Demand for sustainability reports is rising from both investors and regulators. Companies must get serious about ESG data.
With Environmental, Social and Corporate Governance (ESG) factors in the spotlight like never before, asset managers must give them real consideration when making investment decisions.
Why? Because not only do customers increasingly demand products and services that fit their ethical criteria, but governments are also legislating to ensure greater transparency and prevent greenwashing.
Any robust ESG initiative must improve a business’s sustainability indicators and satisfy regulators as well as communicating these achievements to stakeholders – so data is key.
Companies must show how their actions negatively affect or actively contribute towards a more sustainable economy. They can no longer make bold claims about green credentials without backing them up.
Why ESG matters
The focus of ESG spans a variety of factors such as sustainable investments, emissions and other environmental impact assessments, regulatory compliance, equality and diversity measures, and related corporate strategies and governance standards. Taking account of these not only makes good business sense, but is vital for future-proofing any company.
Ignore them and you risk alienating or losing clients and investors, as well as having unhappy and unproductive employees, compliance problems – and even problems recruiting new talent.
In the investment world, more than 90% of asset owners regard ESG criteria as important when selecting external investment managers, according to a survey by bfinance. And 40% say ESG considerations have led to them firing an asset manager.
Demand for “green funds” is huge. ESG funds represent 15% of assets under management in Europe, with €2tn invested, while last year more than half of all inflows into European funds were invested in ESG-related funds, according to research firm Refinitiv Lipper.
This growth is likely to continue. Several initiatives are keeping ESG in the public eye. For example, the United Nations has introduced both the Global Reporting Initiative (UN GRI) – which helps businesses communicate their impact on issues such as climate change, human rights and corruption – and its Sustainable Development Goals (SDGs), aimed at creating a more peaceful and prosperous planet by 2030.
Such policies are voluntary, but increasingly governments legislate to support them. Europe is leading the way – but other regulators are also looking closely at how to ensure companies take ESG seriously.
New ESG rules
The first part of the EU’s Sustainable Finance Disclosure Regulation (SFDR) took effect in March, following on from the Paris Agreement on climate change (COP21). It requires investment managers and financial advisers to disclose information about various ESG considerations. It also requires all funds covered by its Undertakings for the Collective Investment in Transferable Securities (UCITS) directive, including exchange-traded funds (ETFs) and alternative investment funds (AIFs), to be classified by ESG principles.
For example, an “article 6” fund is one that makes no sustainability claims, while “article 8” is light green, with reasonable sustainability credentials. An “article 9” fund is dark green, with strong ESG credentials.
The SFDR deadline in January 2022 brings in periodic reporting. SFDR is likely to prevent greenwashing, but companies may find that meeting these new obligations will be costly.
Other EU initiatives are also recent or imminent, such as the taxonomy for sustainable activities (a language framework), which came into effect in July 2020 and the Green Bond Standard, which is under EU consideration.
Singapore has rules similar to SFDR and we expect further legislation in other countries. Under President Biden, the US has rejoined the Paris Agreement and will probably need its own rules to satisfy the target of net zero emissions by 2050. In fact, every jurisdiction that has signed up to the Paris Accord will have to translate it into local rules.
It’s all about the data…
Data is the heart of ESG, whether it’s used internally to make better business decisions, verifies statements sent to investors or helps meet legal requirements.
The reporting requirements of new rules like SFDR will drive up costs for asset managers – and present challenges. They will need to collect data about all their investments. If they are investing in liquid, listed companies, that will be relatively easy. But if the investments are in real estate or private equity, the challenge will be greater – the data won’t be on Bloomberg, for example.
There are two ways around this. One is to send a survey to the management company, with questions on sustainability, carbon consumption, waste consumption and so on. The other approach, known as “extended approximation”, involves looking for data already available for listed companies and using it as a proxy for a private company.
The right way will depend on circumstances. Surveys will be more accurate, but more expensive.
Companies cannot ignore ESG. Many businesses now consider it a hygiene factor. Building and executing a comprehensive ESG strategy – which takes data seriously – will be key to survival.
Why Intertrust Group?
- Managing accounting and reporting obligations
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