By Kifaya Belkaaloul, head of Regulatory, NeoXam
As Environmental, Social and Governance (ESG) investing becomes a vital offering for financial institutions, there has been a marked rise in marketing efforts of these capabilities and subsequently an increase in accusations of greenwashing facing major financial institutions.
The current allegations against DWS are gaining a head of steam – demonstrated by the resignation of its chief executive hours after its own offices, along with those of majority owner Deutsche Bank, were raided by police investigating the case. What we are learning as the space develops is that ESG data is vitally important to not only effectively progress, but also to ensure that you don’t stray into the territory of overclaiming or mislabeling.
While investors withdrew £1.53 billion from equity funds in March this year amid heavy market turbulence, caused mainly by Russia’s invasion of Ukraine, ESG funds remained in favour among investors – with inflows climbing to £136 million. Undoubtedly, it is a space with huge growth potential that continues to accelerate. This is even demonstrated in job data – the number of senior level ESG jobs in UK financial services businesses jumped by 50% between June 2020 and June 2021, according to research from New Street Consulting Group.
As the desire to allocate funds towards ESG investments rises, the information that underpins these scores is being increasingly demanded by investors. However, it isn’t just for funds labelled as ‘ESG’ that investors want to know this kind of information, it is for all funds and assets in the same way that they demand information on financial performance.
The fact is, it is now seen as a fundamentally important information category, which can also be relevant to the broader mission statements of both asset managers and their clients. All asset managers now have to be able to show accurate ESG scores, and service providers need to be able to aid asset managers/clients to legitimise the actual scoring.
When it comes to avoiding greenwashing, firms need to be able to present a full picture of their holdings to both investor and regulatory bodies. It is certainly possible that a lack of insight into the quality of the data underpinning the supposed ESG credentials of assets could, in many cases, be the reason for unwitting greenwashing, rather than it stemming from a deliberate attempt to try to mislead investors. The average country garden is a mix of weeds and flowers, but without digging a little deeper, the weeds can often go unnoticed. It is the same when it comes to ESG analysis – it is a vastly complex area and without a rigorous and microscopic view of the data that sits beneath, it is impossible to paint a complete picture.
Part of the problem is that the major data providers all have different methodologies when establishing their own ESG ratings – this differs from the relatively much more developed credit ratings space, where a few large providers have a broadly harmonised view of how to measure credit ratings. In addition to this, the regulatory space governing ESG investing is woefully underdeveloped relative to other areas of investing, especially in regions outside of Europe.
Therefore, the onus is on financial institutions to take control of the evaluations process. This way, if or when the regulators do come knocking, their requirements can be met by demonstrating a data-driven understanding of the credentials behind ESG claims – but only if the data management systems being utilised are up to scratch.
Ultimately, firms have to be able to harness the data that underpins these ESG scores, and present it in a simple, clear way to investors and regulators alike. That will ensure consistency, as well as enabling the easy confirmation of data quality. Firms have to empower the ESG specialists, investment teams and reporting teams, by providing them with real, quality and transparent data around all three elements of ESG when analysing investments. Without shining a light on the data that sits behind the statements, we are simply walking in the dark when it comes to ESG.
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