Climate change has already begun to affect business, with extreme weather, flooding, wildfires and drought threatening company assets and supply chains. As the environment evolves, companies that improve their energy efficiency and create new products and services will survive and companies that are slow to change will struggle. The financial services community is keenly aware of this challenge, and many professional money managers are now looking for ways to integrate environmental, social and governance data into their investment approaches to better manage risk and find opportunities in a changing world.
Increased investor appetite and the potential for outsized risk-adjusted returns has boosted total assets in sustainable investment strategies to $12 trillion in the United States, or one quarter of all professional assets under management, according to the US SIF 2018 Trends Report. The amount is up 38% from 2016, with more double-digit growth expected in the years ahead.
But while sustainable investing has become a more mainstream concept, investors in the sector face challenges. One of the most pressing issues is a lack of access to reliable and consistent ESG data.
Investors rely on ESG data to identify which companies may be best positioned to succeed in a sustainable world. However, the lack of consistent reporting standards for ESG data presents a major barrier to the increased adoption of sustainable investing. This hurdle forces investors to expend an excessive amount of already limited resources trying to standardize and interpret unstructured data, slowing down experienced investors and inhibiting new entrants from joining the field.
While it may be years before ESG data becomes fully standardized, the investment community can take steps now to access more meaningful and actionable ESG data to make better informed investment decisions.
The case for standardization
One of the main issues for ESG-oriented investors today is the lack of standardized data in the market. Businesses reporting their own ESG performance metrics are trying to satisfy increasing investor and stakeholder demand for more and better data. Meeting this demand is especially challenging given the plethora of reporting platforms and requirements and lack of consistent reporting standards for sustainability performance. As a result, different data points may be reported across companies in the same sector. Similarly, different data points being could be reported by the same company from one year to the next.
Investors now face the challenge of how to evaluate more company-generated data, including a wider array of sustainability reports, documents, filings and websites, further adding to the confusion and level of effort required to make sense of these new ways of evaluating how company management creates or destroys value. Despite these inconsistencies in the data, organizations such as the Sustainability Accounting Standards Board have made immense progress in creating reporting standards. SASB recently released 77 industry-specific accounting standards that help investors understand how material sustainability issues can impact a company’s financial performance. These standards have been publicly adopted by a dozen major international companies. And while SASB and organizations such as the Global Reporting Initiative — whose standards are utilized by 75% of the world’s 250 largest companies — enable real action and positive material benefits for all, they also create more information to sort through. This influx of unstructured data presents a need for a data provider to package and present this information in an easily consumable format.