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Is “ESG” a consumer-friendly term?

24/02/2019

 

How does one name a type of investment in a way that reliably reflects its remit? With difficulty, is the short answer. Arguably, it is even trickier to get this right in the responsible investment realm. We have found in previous research that private investors can take “sustainable” in a fund name context to mean it is an investment for the long-term, or one that aims to be slow and steady. “ESG” and “SRI” are problematic simply by virtue of being acronyms. When asset managers don’t spell things out, some potential investors don’t feel comfortable. They worry about lack of transparency, a possible tendency to hide behind jargon and maintain an air of superiority through misdirection and sleight of hand.

Spelt out, “environmental, social and governance” is helpful in informing people what it’s all about. Yet it still alludes full comprehension, continuing to be used interchangeably with “ethical” even by professional investors. And, of course, it is a bit of a mouthful.

As a more light-hearted – but still insightful – component of our private investor research on responsible investing, we asked the 1,001 investors surveyed to tell us what they think ESG stands for in an investment context. We also requested that they avoid Googling the answer (where’s the fun in that?).

Two fifths of investors did not venture an answer for “E” or “S”, and a slightly higher proportion were thrown by the “G”. Just over a tenth (13%) of private investors can correctly spell out ESG unabbreviated, with a little flexibility given by us for very close answers (“environment” instead of “environmental”, for example – we’re not harsh markers here at RiF).

After “environment”, “environmental” or “environmentally”, popular guesses for “E” included “ethical”, “economic” and “estimated”. After “social”, “sustainable”, “standards” and “savings” were common suggestions for the “S”. For “G”, popular wrong answers included “growth”, “group”, “guidance” and “guaranteed”. No prizes go to the private investor who thought it would be witty/clever to suggest “egg”, nor the investor who wrote in “sausages” (incredibly, not the same individual).

Among private investors, awareness of ESG is growing from a low base. There have been quite a few FT articles on the subject in the last year and also some in specialist investment mags, which has played a role in informing investors. Yet is the term really the one to take this kind of investing mainstream? Should it be used mainly as an industry term, rather than one that makes top billing in ads and brochures?

There is work both at the EU level and within the UK’s Investment Association to create a taxonomy for ESG-esque funds. We are all for this, as better-defined criteria will improve the quality of investments in this area and set categories will help professional investors to benchmark performance where comparison with ‘other’ funds isn’t so appropriate (perhaps for positive impact funds, for example).

Yet in the consumer context, too much focus on taxonomy may put people off. They don’t need sub-genres for a new type of tune they’re just starting to hum. Would “responsible” be the word to have front and centre?

For our Responsible Investment Review report, we have interviewed over 60 experts, including around the topic of tools and methodologies fund managers rely on to construct ESG funds, and what investors who are keen on aligning their investment with their values of beliefs might expect. For more on benefits and downsides of different ESG research processes and to find out more about the report, please get in touch with the team by email here.

ESG Analytics: Data availability and new tools on the horizon

10/02/2019

In our previous blog posts, we have talked about scepticism around responsible and sustainable investing as well as how it has been impacted by wider trends in the investment world, such as the popularity of passive investing and emergence of ETFs. We also covered issues such as worries around sacrificing returns, but what happens when we get slightly more granular with ESG factors and the sustainable research process?

‘Big Data’ has undoubtedly shaken up numerous global industries, from logistics to retail to media and many more. Behavioural data analytics are increasingly being used for R&D, sales and marketing, and other business functions and processes. Investment is of course no different, and quant tools have played a vital role in it for many years. It should come as no surprise then, that the whole spectrum of responsible investing (from ESG to impact investing) is also very reliant on data, including company disclosures, voting records. Some say ESG-specific performance metrics are still in their infancy – quite a contrast to the financial statements and annual reports that analysts have incorporated into their research process for years. However, there is a universe of tools out there to help professional investors get their ESG data.

ESG Research and analysis is likely to comprise some form of analysis of regulatory filings, and public data, as well as company reports. In addition to these resources, sustainability research firms and ratings agencies such as Sustainalytics are becoming a major force in the market. MSCI compiles its own ESG ratings, and agencies such as Vigeo Eiris are providing in-depth data to professional investors around the world.

In the Netherlands, institutional asset manager APG, a subsidiary of the country’s National Civil Pension Fund (the pension fund for government and education employees) recently announced the use of artificial intelligence to identify innovative opportunities for investing in companies that contribute to solving climate change, education and healthcare issues among others.

In Japan, Hiro Mizuno, executive managing director of the country’s Government Pension Fund (who is also the world’s largest investor), gave a keynote presentation at a conference emphasising the potential of AI and machine learning in mining large amounts of environmental and similar data to make evidence available to investors in real time.
AI-powered analytics could be particularly useful in impact investing, where measurement of impact and relating outcomes to particular goals is crucial. Measuring third party data (as opposed to self-reported), US-based Distilled Analytics says it has the ability to measure the non-financial risks and impacts of particular investments through AI-driven research in addition to human analysis.

Of course, we have barely begun to explore the full potential of artificial intelligence, and many ESG integration processes use a combination of quantitative and qualitative factors – one frequently used approach is to benchmark on quantitative factors and then overlay qualitative or ‘subjective’ factors – this is often to ensure that the investments reflect the beliefs or values of the investor(s), though this is in no way guaranteed. The parts of the ESG research process that are driven by formulas or ratings, and the extent of subjective judgement applied by analysts will of course vary with every asset manager. While there may be companies that are more or less universally viewed as ‘bad actors’ in either E, S, or G, for some (such as Tesla, for example) their rating is hotly contested. This means that qualitative judgement is welcome – especially if analysing whether a specific investment has had a particular impact or outcome.

For our Responsible Investment Review report, we have interviewed over 60 experts, including around the topic of tools and methodologies fund managers rely on to construct ESG funds, and what investors who are keen on aligning their investment with their values of beliefs might expect. For more on benefits and downsides of different ESG research processes and to find out more about the report, please get in touch with the team by email here.

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