Will ESG investors wake up and smell the coffee
One thing that I’ve missed over the past year is the routine of stopping for coffee on the way to work. My Usual Cafe is a locally run business that sells ethically traded organic coffee and milk. Trying to replicate the experience at home turned out to be quite an education. Getting the right milk was easy: it’s delivered to our door from a local farm. Then came some difficulty in finding a coffee that my wife and I could agree was not too weak, too bitter, or too expensive. It’s probably still a work in progress. But finding ethically marketed coffee was not the challenge we expected. We simply looked for the fair trade accreditation on the box, checked what that accreditation meant, and now we search for the same accreditation every time we are tempted to try a different cafe. So why isn’t sustainable investing that simple and offers the same level of confidence?
From the trend towards a new “business as usual”
Investment in durable assets in the United States has grown by 42% over the past two years, while in Europe ESG assets are expected to represent between 41% and 57% of total mutual fund assets. ‘by 2025. These figures are encouraging; however, achieving ESG ambitions can take many years – and significant resources – especially for sectors such as energy where the transition is more complex. Therefore, companies will only invest for the long term – and real environmental and social change will happen – only if the trend towards ESG investing becomes a permanent change in the mindset of companies and investors.
How can we as an industry do this? By allowing an investor to choose assets that meet their ESG priorities as easily as choosing a brand of coffee. And just as important, they must trust the accreditation process to be confident in this choice. Otherwise, there is a high risk of scandal or disillusionment that could hinder progress.
The difficulty is that the ESG covers a wide range of issues, from carbon emissions and labor rights, to health and safety and diversity in the workplace. Investors have different priorities that guide their decision making; however, in all cases, they need data. Specifically, they need clear and consistent Key Performance Indicators (KPIs) on the issues that affect them, which they can measure and monitor. Without these, it is impossible to determine whether an investment meets and continues to meet their ESG criteria.
ESG data is already a big deal, with global spending is expected to reach $ 1 billion this year. However, it is only money well spent if the data is credible, globally consistent, and drives both investor confidence and business priorities. This is where regulators, rating agencies, fintechs and market data providers can make a real difference. With credible and standardized industry-wide metrics, what is now an investment trend could become the ânew normalâ for investment decision making.
A comprehensive approach to ESG data
Various initiatives are already underway to achieve this. Betsy Atkins described some of these in her Forbes article, âESG Measures – A Way Forward for Businessesâ in October 2020. We are also seeing much more attention from governments and regulators, such as the EU. . taxonomy for sustainable activities, and Sustainable Finance Disclosure Regulation (SFDR), which entered into force in March 2021. An âeco-labelâ is also planned to make it easier for retail investors to integrate ESG factors into their decision-making.
The real impetus, however, may come from asset managers, as they represent the end investor. Over 3,000 asset owners, investment managers and service providers have committed to United Nations Principles of Responsible Investment, with an increase of 28% in the past year alone. Our 2021 FIS Readiness Report also found that 45% of buy-side companies will invest in capabilities to support new or emerging ESG compliance and reporting requirements over the next 12 months.
Data for decision making
While creating a credible and consistent data set is a critical first step, the value of that data is only realized if it can be effectively monitored. For many asset managers, this is a labor intensive activity that diverts resources from the investor experience. FinTechs can help you by leveraging our technology to measure compliance in real time. Use artificial intelligence (AI) and machine learning, for example, we can quickly analyze not only traditional investor data, but also alternative and unstructured data such as news and social media activity, and provide real-time updates on ESG compliance and credentials. We are only in the early stages of integrating ESG into investment decision making, but we all have a role to play. Our success in this area will be measured not only by the return on investment, but also by the positive impact on our environment and our societies.
To achieve this, I would suggest the following five priorities for building trust, credibility and effective ESG reporting and compliance:
1. Clearly defined and widely accepted standards that help companies develop credible ESG strategies and measure and report on their performance.
2. Tools to help investors reflect their own ESG priorities in their investment choices, and to remain confident in the credibility of the data on which these decisions are made.
3. Tools and guidelines to help auditors scrutinize ESG information and activities
4. Global coordination to avoid fragmentation and inconsistencies that could undermine investor confidence and increase the burden of ESG monitoring
5. Regulatory oversight to help institutional, retail and multilateral investors assess whether a company’s actions and culture reflect ESG values.
I feel much better after my first coffee of the day. And if investors feel good and have confidence in their investment choices, we can create positive environmental and social change. But the art of coffee may just be one step too far.