Climate Change, ESG and the Quest for Better Data

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After what feels like another incredibly hot summer across many parts of the planet, the latest findings from S&P Global suggest that US companies are taking note of the effect that climate change is having on their business. S&P analyzed 10 years of earnings call transcripts and found that the terms “climate” and “weather” were among the most frequently mentioned terms by S&P 500 executives. The report goes on to note that “we may begin to see institutional investors build climate risk factors into their portfolio selection processes, thereby placing greater emphasis on climate when directing investments.”

There is more than one way to look at a company’s performance, and so I’ll focus here on the use of ESG – Environmental, Social and Governance data to provide greater insights into a company. ESG, as explained previously, is a set of numerous and ever-shifting factors that can be incorporated as part of the investment decision-making process.

The ESG data itself is provided by publicly-traded companies through their annual financial reports and CSR reports, and then incorporated into the report and ratings services of ESG data providers like Bloomberg ESG Data Service; Corporate Knights Global 100; DowJones Sustainability Index (DJSI); Institutional Shareholder Services (ISS); MSCI ESG Research; Thomson Reuters ESG Research Data and several others. ETF providers then use this information to create thematic ETFs, and managers incorporate this information into actively managed ESG funds.

Climate Change

The ever-present danger in this area is that company-reported environmental data will consist of green fluffy stuff that they want you to notice as part of ongoing commitments to corporate social responsibility, and corporate branding – i.e. “green-washing”. We believe this risk is manageable however, and can, if managed well, provide more granular information on a company’s non-financial performance.

The key is using a lens like ESG to analyse comparable data. While standards are evolving, the important point is that there are comparable standards, which come from a rising number of international standards bodies, ranging from the GRI and SASB, through to concerted efforts at an in intra-governmental level like the TCFD. This list is not exhaustive; however, the acronyms are less important than the direction of travel. Standards are getting better, and the standards bodies are starting to work closer together to make it easier to compare and contrast different reporting data from different companies. This is leading to more informed ESG investment decisions and offers the opportunity for AI and advanced analytics to sift through the data to provide actionable insights for institutional investors.

Retail investors are also showing increased awareness in this area, with a 2017 Natixis Global Asset Management survey across 22 countries, showing that 70% of retail investors think that environmental and social objectives are important factors in investments. As BNP Paribas have noted, one of the EU High-Level Expert Group (HLEG) recommendations was to give retail investors the tools to allow them to invest in sustainable funds with greater ease and thus you will start to hear more on this area in the coming months.

Tim Fright Tim Fright is the Founding Director of Plenitude. Tim and his colleagues use Hedge Fund-style analytics and Big Data to create an Environmental Social and Governance (ESG) investing framework that can offer responsible investment opportunities with superior risk-adjusted returns. Tim is a graduate of the University of Cambridge and King’s College, London and has more than ten years’ experience in technology and government. He is a communications adviser to, and investor in, several tech start-ups, a Fellow of the Royal Geographical Society, and was part of a 2008 Antarctic expedition which undertook environmental research analysing the effects of climate change on the Beardmore Glacier.

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