This October, Nasdaq Corporate Solutions in London hosted a panel discussion on the increasing importance of Environmental, Social and Governance (ESG) non-financial data and ESG ratings in buy-side investment decisions. Entitled “ESG & the Changing Investment landscape – How Companies Need to Adapt,” the panel discussion featured speakers from T. Rowe Price, DWS Investment, Sustainalytics and Standard Chartered.
ESG considerations are becoming more relevant globally and companies are now being evaluated on “non-financial” metrics alongside more common financial metrics. Changing priorities such as climate change and gender equality have become critical issues for the global community. As ESG metrics increase in importance, asset managers are increasingly analyzing ESG data in conjunction with traditional financial measures.
A UK-based active portfolio manager recently told Nasdaq’s Global Perception that, “ESG is impacting the cost of capital and therefore, our target price. That is why it is very important. It is much more than just a feel good factor. It is affecting our cost of capital. Bad ESG – high cost of capital. Good ESG – low cost of capital. Low cost of capital – higher target price.”
With these trends comes an increasing demand for ESG data as well as more robust reporting from companies. While the G of ESG is fairly well established, the Environmental (E) and Social (S) often have different impacts depending on markets, sectors, geographic location.
Panelists addressed a number of important topics such as how ESG data is increasingly integrated into investment decisions and the influence of ESG data and ratings in buy-side investment decisions. “I always thought that ESG integration was a normal part of my investment process,” said Maria Drew from T. Rowe Price when referring to her background as a fund manager. “We really think about ESG integration in all of the investments we make at T. Rowe Price, it’s not about having separate sustainability funds.”
Senior ESG strategist at DWS, Murray Birt, commented how DWS has created an ESG engine, which is integrated into the platform used by portfolio managers. “We combine data from six different ESG data providers and we create a synthesis ESG score from the largest ESG data providers, such as Sustainalytics, MSCI and ISS. All of this information is available to our investment professionals; all of our active investment professionals have had mandatory ESG training. This is starting to be integrated into their performance evaluation and portfolio reviews.”
Jean-Claude Berthelot from Sustainalytics agreed that there is a trend with investors becoming more sophisticated in analyzing ESG data; Jean-Claude spoke of how the ESG ratings provider evaluates the financial materiality of E, S and G issues that are financially material to each sub industry and company. “We look at E, S and G issues to determine how exposed to ESG risk is that sector and then how exposed is a company compared to its sector.” Sustainalytics commented that their analysts rely mainly on publically available information and cover 12,000 corporates for their investment management clients. Mr. Berthelot encouraged companies to reach out to Sustainalytics to receive a draft version of their report and, if necessary, engage with them should there be need for correction. “We provide a chance for the company to engage with the ESG analyst.”
The Panelists discussed the challenges around ESG data from corporate and investor perspectives; financial data is highly standardized and regulated while ESG data is non-standardized and only lightly regulated. The role of ESG ratings providers for the buy-side is to uncover data that is not uniformly reported and pull it together. For the buy-side, “it’s about trying to pull data together that is otherwise not available in a standardized format,” commented Maria Drew from T. Rowe Price.
The Panelists spoke of how companies should play a role in deciding which data points are important to the business and releasing those in a way so that they are easy to pick up, which will make it easier for investment professionals and ratings agencies to ensure the data for your company is relevant and accurate.
In relation to tying E&S to remuneration, the Panel commented that Environmental and Social issues are unique to whatever sub sector you are in and companies should choose the issues that are really going to affect future revenue and profit streams; they further mentioned that the EU Sustainable Finance Action Plan published some guidance on implementing the non-financial disclosure directive which introduced a double materiality requirement for investors meaning that in addition to the financial data they are responsible for looking at the total Environmental and Social impact of a company. It was acknowledged that this approach is often difficult, as companies need to balance how you get the returns up [in the short/medium term] verses building sustainably for the long term.
Global Head of Investor Relations at Standard Chartered, Mark Stride spoke of how they are shifting their environmental and sustainability efforts away from just looking at what they won’t do (the risks) to how they can actively be a force for good, integrating sustainability into the organizational decision-making (the opportunities). “The market quite rightly focuses mainly on company and sector ESG risks, but I’m most excited about the ESG opportunities. What can the investment community do to encourage companies that are not good on certain environmental and social aspects today to be great in the future – that’s a big additional source of alpha.”
The workshop also offered some key take-aways and practical tips for IROs when thinking about their ESG communications strategy:
- Many sources of ESG data are used by the investment community to evaluate their investment decisions including in house systems and research
- On ESG disclosure: Ensure that the data is made “easily” available in a structured way -“Put data into Excel tables, so that AI tools pick them up.” And engage with the investment community and ESG data providers around your ESG strategy to ensure your data is accurate
- Issuers should consider sustainability roadshows: “We find sustainability roadshows really useful to really go through ESG issues in-depth.”
- Identify important ESG issues material to your business: “You need to choose the issues that are really going to affect your future revenue and profit streams”. Think about what risks are more specific to you as a business; and get the whole company behind taking action on those that resonate most strongly – your employees are your most important advocates”
- Understand your company’s physical climate risk: “We recommended corporates should think about disclosing physical climate risk and opportunities.”
In conclusion, panelists commented on the outlook for ESG integration within the investment community; whether or not IROs are likely to get more ESG type questions in investor meetings ahead. “The process of ESG integration is proceeding across asset managers, but is also within asset managers.” said DWS’ Murray Birt. ”Different people are going at different speeds and different levels of belief….there is a sea change and down the road, PMs will be strengthening their efforts and the questions they will be asking.”