The industry response to the challenge of ESG Data
How are asset managers making ESG categorisations given the patchy nature of the data? Sometimes off-the-shelf ratings are appropriate, said the panel, but increasingly raw data have to gathered manually. This ranges from factors such as board diversity, carbon emissions, involvement information (in controversial weapons or sanctioned countries, for example), deforestation policy, “controversy data” (i.e. negative press and regulatory reports) and more. This information is gathered directly from company publications, from third parties such as NGOs and the press.
Nikkie Pelzer Impact Manager with Triodos Investment Management said their teams break the challenges down in to 42 indicators, with some easier to assess than others. She noted that sometimes it is not possible or applicable to make these judgements (such with as gender diversity in very small companies), in which case the fund just needs to explain.
A taxonomy methodology for green bonds, has been implemented at NN Investment Partners, their Green Bond Analyst Isobel Edwards explained. “The ESG data gap was obvious, as you can't use third-party databases, so you have to investigate those projects directly,” she said. This meant literally ringing up issuers to ask for data and look at the projects themselves, put the data into compatible formats, and make alignments with the EU taxonomy.
Lack of awareness by companies
Issuers don’t always have ready answers. “Sovereigns struggled somewhat to communicate the data because of the format of their green bond frameworks. Also bank green bonds could be difficult as they are often two steps away from the direct facility information,” Ms Edwards added, citing just two examples. “Also, sometimes these metrics aren’t aligned. Not that they aren’t green, but that they are no longer in line with the taxonomy,” she said. She cited the case of some building certifications which fell out of favour recently.
Highly granular data required
Eric Borremans, Head of ESG at Pictet Asset Management said that their teams also gather the data in this granular fashion, with the complications this implies. “In our Clean Energy Fund, we have exposure to battery manufacturers, which on the face of it might seem unproblematic. But then you have to ask whether these are for stationary use or for transportation, and whether there is a system in place for recycling their products,” he said.
Furthermore, he noted that the challenge of collecting this data is considerable for European firms, but is greater still for US businesses which have little or no awareness of the EU water directive, the air pollution directive and the rest. “When you publish disclosures, you just have to be very clear about the methodology that you have used, and whether this is in-house or an external data source.”
Rising to the challenge
“Despite the challenges, we achieved our goals,” Mr Borremans said. Yet he added that because this process required considerable effort he is looking forward to the time when more and higher quality data are more easily available to enable this process can be industrialised.