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A recent survey completed by the Chartered Financial Analysts (CFA) Institute found that “valuation approaches lack consistency, and investment professionals report various ways of incorporating ESG into equity analysis.”
It’s no secret that investors struggle with assessing the impact of their ESG investments as a result of unverified, opaque, and incompatible measurement frameworks. Many businesses have acknowledged and even embraced the U.N. General Assembly’s Sustainable Development Goals (SDGs) and often include their version of reporting in an annual Corporate Sustainability Report or company disclosure. However, not all ESG factors are created equally. So how can investors weigh ESG data to make informed and socially conscious investments?
Understanding the differences between “soft” and “hard” data.
The CFA’s report goes on to give a distinct classification between “soft” and “hard” ESG data. Hard ESG data is available in the traditional format, is easily quantifiable, and can be readily plugged into valuation models. On the other hand, soft data is qualitative and challenging to capture in the investment decision-making process.
At Aneuvia, we compensate for the inevitable task of working with potentially critical hard and soft ESG data points by taking quantitative and qualitative approaches to ESG integration.
From a quantitative standpoint, we rely on Bloomberg’s proprietary scores built on the foundation of a business’s ESG disclosures. In addition to collecting data from corporate filings and Carbon Disclosure Project disclosures, Bloomberg also conducts an ESG survey which is derived from a quantitative model that minimizes noise, size bias, and disclosure gaps.
From a qualitative standpoint, we procure data from Sustainalytics, which calculates an overall percentile rank assigned to a business based on its ESG total score relative to its industry competitors. We also draw insights from S&P Global’s SAM, which evaluates companies on sustainability criteria within ESG factors.
Continued ESG success will hinge heavily on better data, transparency, governance, and accountability. By setting up a global ESG data measurement framework, investors can measure, monitor, and manage the impact generated by their portfolio.
ESG involves researching and factoring in Environmental, Social and Governance issues, in addition to the usual financials, when evaluating potential stocks. Due to the novel coronavirus pandemic and rising concern for the effects of climate change, socially responsible and sustainable investing has been on the rise. In the third quarter of 2020, $81 billion went towards the global sustainable fund network (Source: Morningstar).
So where does this leave ESG investing in 2021? We believe that COVID-19 has accelerated the adoption of ESG investing as the new normal. Here are three key shifts that we predict for 2021 and beyond, which further underscore why ESG is emerging as the new normal.
1. The ESG market will continue to grow.
We believe that businesses who methodically prioritize their ESG footprint and operations will increase value among investors. Building on this, Bank of America recently projected that the money in ESG investing could rise to between $15 and $20 trillion over the next two decades, which is equivalent to the size of the S&P 500 today. This could be attributed to a few factors: growing eco-consciousness among consumers, corporate America being held accountable to their ESG performance, and changing demographics.
2. ESG reporting will be a necessity - not a choice.
In our latest report, ESG Data, Impact Criteria and Measurement, we note that an increasing number of regulatory bodies are embracing ESG, and making ESG reporting mandatory for businesses and investors. The next decade might see ESG reporting becoming a necessity, rather than a choice. Ultimately, ESG data holds answers to many of the non-financial risks that affect an investment’s performance.
3. Growing advocacy for a global, mandated, and auditable ESG reporting framework.
ESG data has proven to be a bottleneck for many investors due to data issues relating to quality, comparability, validity, and more. A positive development in this space, the Organisation for Economic Co-operation and Development (OECD) has noted that “ESG scoring and reporting has the potential to unlock a significant amount of information on the management and resilience of companies, but it will require agreed global data standards and regulations.”
Ultimately, we believe that sustainable businesses that improve their communities and the environment are - and will continue to be - in high demand. Collective pursuit for better transparency will help investors leverage ESG to drive positive change where it matters.