ESG-based investing is becoming a powerful trend in financial markets. How is it possible for investors to make sense of the different metrics?
When BlackRock, one of the world’s largest fund managers, gets serious about the risks that climate change can pose to businesses, then the market takes notice.
In his call for invested firms to deliver a sound, long-term strategy on environmental, governance and social (ESG) issues, Blackrock CEO Larry Fink warned that his firm will oppose the re-election of directors if they fail to deliver their duties when it comes to addressing climate change risk.
For corporates, however, explaining to investors how they manage these risks is far easier said than done, particularly as many still consider ESG reporting as an optional activity.
The challenge for an ESG-conscious investor is standardizing various disclosures and data points to give a coherent perspective on a company’s investability.
Indeed, each could have a unique perspective on which data points are material and which are not, and may already incorporate their own blend of E, S or G-related data.
Watch video — How much is ESG a competitive advantage?
Different data approaches
Many investors integrate ESG information into their processes around company valuation, risk management and regulatory compliance, but all do so differently.
Some, for example, choose to report their carbon exposure “per division” while others will disclose it per employee, use different units or do not report anything altogether.
Collecting this data and making it comparable is a time-intensive exercise for research analysts and one that usually requires a great deal of expertise.
ESG data tools
New product applications and features available on Thomson Reuters Eikon combine carefully gathered and standardized ESG raw data with powerful, innovative tools to efficiently support different responsible investment techniques.
Thomson Reuters’ experienced ESG research analysts scour corporate annual reports, websites and other disclosures, before standardizing this information so it can be easily used for portfolio analysis, equity research, screening or quantitative analytics.
Thomson Reuters has also partnered with TruValue Labs’ to provide real-time ESG data to Eikon users. Insight360, the Eikon app developed and supported by TruValue Labs, inc., leverages the Sustainability Accounting Standards Board’s (SASB) ESG Materiality Framework to find opportunities and manage risks.
While others may produce scores or ratings without much indication of how the final figures were calculated, Thomson Reuters ESG data and solutions are fully transparent.
Philipova explains: “Our philosophy is to be as transparent as possible about where each data point came from: which document, which page, which section.
“We also show the conversion and standardization of the data and, from there, how we’ve arrived at our final score. There are no black boxes.”
Working across 10 categories under the banner of environmental, governance and social issues, Thomson Reuters captures over 400 company-level ESG data points, ratios and analytics, and then produces 178 measures to derive a relative company percentage ranked score of A+ (strong performance) to D- (weak performance).
Via the Eikon platform, these scores can be unpicked to show the raw data behind them and allow users to adapt them into their personal workflows or analyses.
Analytics and flexibility
Individual points can be scrutinized and questioned further, too, should more detail be needed about a company’s targets, policies or measurement techniques, for example.
Users can also modify the exact methodology behind the scoring and even build their own customized ESG ratings of companies or portfolios.
Such analysis allows for the creation of ESG-focused investment vehicles, such as ETFs or index funds, with tight disclosure requirements to companies that previously couldn’t be assessed.
Thomson Reuters also has 40 years’ experience in the index business and provides a range of indices for the creation of investment vehicles, including fossil free indices, diversity and inclusion indices and ESG Indices.
Watch video — Introducing the Thomson Reuters Diversity & Inclusion Index
“You don’t need to be an ESG expert to invest in ESG,” Philipova summarizes.
“Though more and more investors know they should factor these issues into their work, they may feel like they don’t have the in-house expertise to do it alone.
“The good news is that there is a broad range of products and services that give investors access to sustainable investment opportunities, making it attractive and affordable to all investors.”
Before long, it will not be a question of whether investors integrate ESG information into their research or selection processes, but how they do it and with whom.
With tools like Eikon, which include Thomson Reuters’ robust set of ESG data and real-time ESG data in the Insight360 app, any investor can consider the full, material impact of ESG factors on their portfolios and the long-term health of invested companies.