Using ESG signals in a bottom-up approach of a country, industry or lone issuer can be a crucial differentiator.
The fact that ESG data is becoming an integral part of many fund managers’ processes is not new information – but a recent roundtable event in Singapore illustrated that institutional investors in Asia are also ramping up their interest in the investment discipline.
Julia Gormand, head of market development, investment and advisory for ASEAN at Thomson Reuters and who chaired the day’s discussions, said that one of the key talking points was the fact that ESG is absolutely a key differentiator for all active managers, not just those with a social or environmental conscience.
The message from the panel was clear: everyone in the investment world will consider ESG factors at some point, whether now or tomorrow.
Hardik Shah, ESG Practice Manager at asset manager GMO, illustrated not just how considering these factors can improve investor returns but also how they can be particularly important to the financial health of emerging markets.
A lot of signals can be seen about a country’s future sustainability – or, at least, where its ESG agenda is driving towards – at an early stage in such countries, the panel suggested. Using ESG signals in a bottom-up approach of a country, industry or lone issuer can be a crucial differentiator.
On the other hand, all the panelists spoke to a reality where ESG information can be overlooked as a source of intelligence about the risks facing a company in the long-term. A large carbon footprint or unethical business practices can, for example, be a general indicator about a corporate’s future environmental or governance performance. At the very least, any future reputational losses could easily translate into large financial ones.
“We also spoke about the fact that a company can disclose ESG data, but if they say yes or no to a specific policy, it doesn’t necessarily reflect the reality,” added Gormand, speaking about the tendency for firms to omit details from their disclosures. “You’re not sustainable just because you disclose it.”
Simon Peladeau, portfolio manager, sustainable investments at Lightbulb Capital, a Singaporean investment house, expanded on this idea more. Companies have complete discretion over what they disclose, they said, and is not subject to the same verifications that mainstream financial disclosures are.
“I had a follow-up conversation with one attendee, who added that just because the data is there does not mean the company is necessarily doing it right,” said Gorman.
These factors mean that disclosure rates for ESG data across emerging markets can be low, especially in Asia, even though exchanges increasingly require mandatory disclosure of ESG policies (like Hong Kong’s HKEx) or regular reporting on at least a “comply or explain” basis (such as Singapore’s SGX).
Other corporates find the requirements of the PRI’s disclosure guidelines, or those provided by stock exchanges, too exacting and time consuming to be able to spend resources on the activity. The short term cost of collecting such data from issuers – and even encouraging corporates to disclose the “right” data points – is one of the most critical challenges facing the ESG revolution, the panelists suggested.
“There was a lot of comment around the fact that it’s difficult to find transparent data that is both affordable and possible to integrate into your investment process,” said Gormand. “But we found that there are actually cost-effective ways, rather than just doing it yourself”
As Gormand suggests, further discussions pointed to the existence of some data sources that may not break the bank. Datasets like Thomson Reuters’ ESG metrics can give a solid indicator of a company’s long-term health and a bottom-up view of its inner workings.
With growing interest from the world’s financial institutions – particularly those, like Lightbulb, which already operate within and understand emerging markets – it seems that corporates may not be able to afford to disclose ESG information fully in the future. By the same measure, investors and analysts cannot afford to miss such data’s clear signals – especially if their peers are already demonstrating that it can make a material, long-term difference.
Thomson Reuters can help you use ESG metrics as an indicator of a company’s long-term financial performance.