Thomas McHugh, FINBOURNE Technology co-founder and CEO participated in a session on Understanding the resilience of ESG and impact investing in the face of COVID. He was joined by the CEO of HSBC Asset Management, the Global Head of sustainability at BNP Paribas, and the CEO of International Federated Hermes in a quality discussion.
Watch the full session here
On the overall trajectory of ESG strategies, measurement and sustainability
The panel unanimously believes that ESG is here to stay and will only increase in usage as client demand grows, and the cost of poor ESG weighs in on investments in the form of missed incentives, penalties, or lack of interest from investors.
ESG has seen a meteoric rise in popularity due to client demand and the growing cost of carbon and low ESG investments. One panelist noted that ESG heavy and/or impact investment funds saw inflows 4x in ESG funds versus funds without an ESG strategy.
Stewardship, ESG and impact investing are being integrated in core investment process for larger asset managers similar to other fundamental and quantitative factors. Investment managers serve as the interpreter of ESG data for their clients and investors. ESG data will never be uniform because it is the asset manager’s job to research, discover, and interpret ESG factors for their clients and investors The shift in consumer preferences to be more involved in investment selection, is requiring managers to give clients a choice of ESG focused investment strategies and products.
On ESG data challenges
There are practical challenges around correlating ESG ratings from various agencies and integrating that information into the ideation, portfolio construction, and performance measurement. Investment managers need to establish systems and processes to apply uniformly across the business.
Understanding, from a fundamental or quantitative perspective, the factors underpinning E, S, and G and being able to collect and analyse the data in core investment systems alongside other fundamental and quantitative research is critical to delivering value and insight to clients.
ESG and overall sustainability factors looked at as another set of data to be investigated in the investment process. The cost of carbon production is a real environmental factor that weighs on the long-term value of investments as an example. A recent example of not considering sustainability as a real factor is the social model of Deliveroo which was a contributor to a poor performing IPO.
Firms are also spending time and money on proprietary sustainability research that needs to be stored alongside existing and prospective investments. The challenges are not all about dealing with external sustainability factors, there are internal factors, ratings, and proprietary data to consider. The asset manager needs to demonstrate a complex dynamic process that goes beyond simple ratings.
On ESG data inputs and outputs
The ideal of one standard of ESG reporting framework for issuers and investment funds/portfolios is a ways off. There has been work done by IFRS, SFDR, CSRD, etc. on both the issuer reporting and investment company reporting sides.
A core sustainability reporting data challenge is that investments need to be marked multiple ways and allow for investor reporting, performance calculations, and even portfolio construction to take place in the same systems while using any set of ESG data. This is especially challenging for firms that operate and have clients across many jurisdictions. Larger firms are applying standards in global process and ESG data management in place of global standards for measuring and reporting ESG. As an example, some large firms aim to have an SFDR perspective on every portfolio.
