Asset managers have had two accusations levelled at them when it comes to green investing.
First, that they are not doing enough to use their influence as investors to tackle climate change. And, second, that they have, in some cases, overstated the green credentials of their funds to benefit from the growing interest in sustainable investing.
In their defence, however, investment managers say they are working with “one hand tied behind their backs” — as one portfolio manager puts it — because of a lack of high-quality, comprehensive, and trustworthy data regarding any company’s environmental, social, and governance (ESG) performance.
In short, asset managers say their job as green investors is made more difficult because of the problems in deciphering which companies are better for the planet than others — or, at least, which ones are trying to adapt their production processes and business models to become so.
Elodie Laugel, chief responsible investment officer at French asset manager Amundi, says: “There is a significant shortage of reliable and comparable data across various aspects of ESG. Even for widely used key performance indicators, such as carbon emissions, we encounter substantial discrepancies among data providers, which hinders meaningful comparisons.”
In addition, the quality and granularity of data varies significantly between providers. “This disparity often stems from the simplistic estimation models employed, which can lead to unreliable outputs,” Laugel explains.
Indeed, a BNP Paribas poll last year of 420 investors — including asset owners and managers, hedge funds and private equity groups — found that more than 70 per cent of respondents believed “inconsistent and incomplete” data is the biggest barrier to ESG investing.
Robert Sawbridge, head of responsible investment at Insight Investment, acknowledges these findings, although he suggests the situation has got better.
“The data landscape has improved significantly, driven by regulatory regimes that encourage a higher standard of disclosure,” he says. “However, data coverage is still mainly focused on listed equities and becomes materially patchier when you move to smaller companies and emerging markets.
“Gaps still exist when it comes to different instrument types, such as asset-backed securities or municipal bonds, and there is a reasonable amount of estimation that is required due to lack of disclosure,” Sawbridge adds.
Data providers also recognise this problem. Morningstar says: “The scale and reliability of sustainability data available to investors has seen great progress in recent years, but it can always get better.”
Detractors, however, believe investment managers are guilty of overstating the issue and are using their complaints about data as an excuse for not doing more when it comes to green investing.
Campaign group ShareAction, which has been highly critical of the industry’s approach to sustainable investment, says asset managers are “blaming bad data in a way that doesn’t stand up to scrutiny”.
In a report published last year, which was based on a survey of 77 of the world’s largest asset managers, the campaign group found they had inadequate targets to reduce emissions. They were also continuing to invest in companies expanding their oil and gas production, and were stalling the move to green, clean energy by not investing enough in new low-carbon energy opportunities.
Abhijay Sood, senior research manager at ShareAction, says many asset managers are deploying the manpower and resources to collect ESG data but are just not using it.
“Asset managers often cite lack of reliable data as the reason for not acting on environmental and social issues, but it should not be used as an excuse to stall action — most are not using the existing tools and available information to the degree they could,” he argues.
Although he recognises that the quality and availability of data “is not always perfect”, he believes asset managers are not putting the work in to get hold of the details of where companies might be conducting harmful manufacturing or extraction.
“Very few asset managers report systematic engagement with investee companies to get this information disclosed,” Sood says. “It is difficult to accept asset managers’ complaints about access to information when they do not take steps to improve the situation.” There is also a role for regulators to “require companies” to improve the level of data they provide to investors, he adds.
In response to the accusation that investment companies are using data problems as an excuse, Amundi’s Laugel suggests that “this is not necessarily accurate”.
“Asset managers already utilise a vast array of data points, often sourcing from over a dozen different providers,” she says. “[But], addressing the quality of data is a constant effort and extra-financial data in general has yet to reach the professional standards set by financial data providers.” says.
However, Laugel does concede that some managers may be overstating the problem.
“Data imperfection should not be an excuse for complacency,” she says. “And, when financial market participants start using data more frequently and comprehensively, that’s when we’ll start to see significant progress in quality.”
