Developments and commentary in and around the ESG investment space.

Cerulli
Increasingly worried institutional investors are telling asset managers that despite a flood of ESG data hitting the market in recent years, and all the talk, the quality and transparency has not been there to make reliable or even comparable decisions about climate risk on their investments. This was the overriding message in the latest intelligence gathering from Cerulli.

Nearly half of asset owners are now asking allocators to report on the carbon intensity of a portfolio and provide security-level exposure to climate risk. Around a third of managers want data in the next two years that includes scenario-testing metrics for climate change.

A third are pushing asset allocators to report on thematic metrics that show how their investments are having a measurable social and environmental effect, even though they admit that identifying the impact of their investments is a difficult task.

It is why the industry is so keen to get behind a clear set of global reporting standards.

A problem for asset managers is that they get limited or selective ESG data from portfolio companies. Another stumbling block is the lack of data from third-party providers, as well as ESG factors being applied too subjectively during investment analysis.

“As more asset managers consider material ESG information as part of their investment framework, asset owners want to know how asset managers use ESG data to better understand what a company does and how it does it,” director Michele Giuditta said. “This includes evaluating the asset manager’s ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making.”

While the list of ESG reporting frameworks to choose from keeps growing, none have broken out as a unifying standard. The Big Four accounting firms have reportedly agreed on a formula for auditing climate-risk that was announced at the virtual Davos event last month.

Cerulli says that third-party providers are making headway with data collection and aggregation which combines artificial intelligence, machine learning, big data analysis, and natural language processing techniques to collect ESG information. But a lot rests on the integrity of the data.

However: “These solutions could revolutionise the way asset managers report and the way asset owners understand the risks and opportunities associated with ESG investing,” Giuditta said.