ESG (environmental, social and governance) factors can contribute to the creation of value within the company and are gaining increasing attention and Chirag Patel, EMEA head of the Innovation & Advisory Solutions sector at State Street Global Exchange and State Street Associates comments on the results and prospects.
According to some research today more than a quarter of the world's $88.000 trillion AUM is invested according to ESG criteria, up 17% from the previous year.
However, some ESG factors, such as a company's carbon footprint, the number of women on the board and the workforce employed in the supply chain, are information that is not always reported in a company's financial reports but which, at the same time , are gaining increasing importance in determining an investor's exposure to risk. That said, in addition to generating alpha, ESG factors are increasingly seen as a tool that can identify volatility and risk.
But who are the victims of this lack of data? One case study involves an energy company that, a few years ago, publicly rejected climate science and actively funded groups that opposed environmental regulations. The company in question reported a 99% drop in its share price over five years and eventually filed for Chapter 11 bankruptcy. Investors lost millions but, in reality, could have avoided it.
Having the ability to view a company's non-financial information is extremely important to a growing number of investors and regulators who recognize the potential impact of ESG factors on a company, the returns and risks of an investment portfolio.
The disclosure of relevant information is essential for an informed and knowledgeable evaluation, but often this data is not immediately available.
Our studies show that the main obstacle to the complete integration of ESG criteria is the lack of standardized and good quality data: in fact, 80% of retail and institutional investors believe that there is a lack of standards on ESG integration. In addition, more than half (53%) of institutional investors believe that the lack of data on companies' reported ESG performance is a cause for concern during the investment process, and 92% of respondents would like companies to report explains the ESG factors that significantly influence performance.
The process of efficiently defining and identifying value in order to generate alpha has undergone a dramatic change in the last few decades. Furthermore, investors do not necessarily have the ability or ability to do very granular analysis when evaluating all the assets to which they would like to be exposed.
At the same time we are seeing a growing interest in new technologies, which can offer the possibility to easily study investments using an ESG type analysis.
Investors want to perform well and at the same time be responsible. To be able to do this effectively, they must have access to ESG data, creating a new dimension in the world of investing and having access to an unprecedented amount of corporate data.
As more data becomes available, separating “sound” from “noise” becomes critical. Finding tools that provide access to data, but also previously unusable insights, will really enable investors to identify value quickly and easily.
