ESG: In a good place
In this exclusive Q&A with Hedgeweek, Daniel Johnson (pictured), Senior Vice President, EMEA Fund Services for SS&C Technologies, explains the surge of interest in ESG investments – and examines the growing role ESG data is playing in helping shape asset management decisions.
Is ESG investment a new trend?
Not at all. More than 200 years ago, it began with Socially Responsible Investing (SRI). In the last 20 or 30 years, SRI has moved on significantly.
In 2006, the UN published its Principles for Responsible Investing (PRI). Then, in 2015, its Sustainable Development Goals said we should be using capital in a more productive way to benefit humanity and build long-term sustainability.
The number of signatories to the PRI has risen from 100 to over 4,000 today. These are charitable foundations, enlightened sovereign wealth funds and pension funds who are all saying, “We’re not going to give the money to any manager based on returns. We are interested in what they are going to do with it. But, on the other hand, we also don’t want them to give money to any potentially problematic groups or anybody investing in X.”
More recently, the trend has flipped again. No longer is it about investors saying they will not invest in cluster munitions or tobacco or whale hunting or gambling. Instead, ESG investors only want to invest in specific areas these days, which meet their overall sustainability objectives. So, for example, investors are increasingly interested in giving money to companies investing in energy efficiency, green transportation, pollution prevention, and reduction.
So how are those investment decisions being taken? And what role does data have in supporting the trend?
Obviously, investors don’t want to be told: ‘Trust me, it’s gone to a good place.’ They are increasingly saying: ‘Show me it’s gone to a good place.’
To do that, we need reliable, consistent data so that ESG exposure can be measured and reported credibly. As a result, asset managers are being asked to generate reports and offer ESG monitoring, goals, and targets for their investments.
Investors can see how much capital an asset manager is investing in affordable housing, education, sustainable agriculture or healthcare – even if they don’t give the specific details of the investments they have made.
That sounds tricky. How close are we to getting reliable ESG data on which everyone can agree?
This is one of the significant challenges the entire industry is facing right now. A valid comparison may be to look at the credit rating agencies.
Suppose you go to Fitch, Moody’s or S&P and ask for a rating on a company. The calculation is based on generally accepted and widely available data and similar across rating agencies. In contrast, when it comes to ESG, you are likely to get some quite different answers. The methodologies vary depending on the vendor, the weightings they apply, and the information source.
So, using the right ESG rating vendor becomes a challenge.
There are two approaches to rating a company’s ESG performance. The first approach is to rely primarily on information generated by the company’s press releases and other publicly available information. The second approach relies on external stakeholders – regulators, industry peers, and the news media. These external sources tend to be quicker to flag controversies when things go wrong.
Most ESG vendors produce ratings based on the company’s data – companies like MSCI, Refinitiv or Sustainalytics.
There is a smaller group with the external stakeholder approach – like TruValue Labs and Arabesque. However, they tend to be much smaller firms.
So what kind of tools does SS&C provide for asset managers who want to use ESG data?
We provide the technology solutions which make ESG data available to investors and fund managers. They can use our tools to analyse their portfolios or draw comparisons between different companies.
So what’s the best approach overall?
I think the more asset managers and investors realise no data is perfect, we will see more managers advocate using multiple sets of data.
Is ESG investing a flash in the pan?
Some people are still sceptical about ESG and think it will either go away or never be fully adopted.
I can’t entirely agree because regulation and investors push managers and companies to take all of this more seriously.
Above all, it’s driven primarily by climate change – and I do not see these issues going away for the foreseeable future.
The EU, the UK, the US and Singapore are all looking at stricter regulation on ESG reporting.
Ultimately, regulators are going to push asset managers and investors to act.
Are there other reasons why asset managers are looking so closely at ESG data?
Yes. Some of these companies – for example, renewable energy generators or wind farm developers – have seen their valuations go up significantly as investors look for sustainable investments, partly because they’ve got exceptional ESG ratings and green credentials. So then, some managers are saying, ‘I want to buy the ESG data so I can identify the next sustainable company.’ They are buying the data as a kind of market intelligence – because they think it will benefit them financially.
This data can also help identify the companies with a riskier ESG profile. For example, you don’t want to buy into a company to discover a side-line interest in small arms, gambling or tobacco. That’s when your financial statements are strong, and the dividends are above average, and yet you may have a lower valuation. A low ESG rating may offer the answer. For example, many people will not include a tobacco company in their portfolio, and so it will get excluded by a large segment of the investor universe.
Daniel Johnson, SVP, EMEA Fund Services, SS&C Technologies
Daniel Johnson is a Senior Vice President, Fund Services at SS&C, with over 15 years experience in Fund Services. He is the former head of Wells Fargo European Fund Services and the former global head of valuation and data management. He was the co-author of the 2016 AIMA guide to sound practices on Operational Risk and helped write the 2014 and 2018 AIMA guides to sound practices on Valuation. He was part of the team that launched LaCrosse Global Fund Services in 2008 and Black River Asset Management in 2003. He is a CFA Charterholder and has a Law degree.