NEWS & VIEWS
Last week, in order to gain a better understanding of ESG and its influences on the asset management industry, the FSL Research Team attended the 2019 STOXX Annual Conference: Innovate2Invest. This was the fourth annual conference held in London by STOXX and it included speakers from banks, pension funds, asset managers, trading, regulation and the sustainable research sector. The key speakers included:
- Steffen Hörter, Global Head of ESG at Allianz Global Investors & Member of the high level (Technical) Expert Group of the European Commission
- Simon Howard, Chief Executive Officer at UK Sustainable Finance Association
- Kristin Wallander, Senior Sustainability Analyst at Swedbank
- Søren Hermansen – Author and award winner of Goteborg-award, also known as the environmental version of Nobel Prize. Director at Samsø Energiakademi in Denmark
- Pawel Janus, Head of Passive & ETF Research and Investment Analytics at UBS
- EJ Shin, Portfolio Manager at the Client Portfolio Solutions (CPS) team at BlackRock
- Shila Wattamwar, Executive Director of Client Relations at Sustainalytics
The STOXX Annual Conference has always been focused on the latest trends in the wealth management industry. This year it shifted from AI and digitalisation, which were discussed last year, to ESG and sustainable investment.
As an emerging market, the industry is still working on building benchmarks and taxonomy in order to offer standards and guidance for investments. Dr. Steffen Hörter, Global Head of ESG at Allianz Global Investors, shared their survey result at the conference. 71% investors believe ESG investing will grow dramatically in the following three years. In order to meet customers’ increasing needs on sustainable investments, the wealth management industry currently has to either rely on several ESG data vendors or establish their own in-house research teams to provide themselves with the necessary data for investment decisions. Some organisations also rely on both internal and external ESG sources.
ESG data from third-party vendors has been widely used in the industry, even though there are debates on the quality of the data. Interesting arguments were given by Dr. Hörter and Kristin Wallander at the conference. Dr. Hörter, a member of the High Level (Technical) Expert Group advising the European Commission on establishing ESG benchmarks and taxonomy, has found the ratings from different ESG data providers are lowly correlated across the same investment universe. The correlation rate of ratings from the top 2 vendors – MSCI and Sustainalytics is only 0.2 (where 1 is total overlap and 0 is no overlap). Kristin Wallander from Swedbank believes the current market ESG ratings are backward looking and out of date, because data vendors update their ratings every January and companies’ financial reports are not released until April, consequently, some of the underlying data that these ratings are based on are 2-years old when these ratings are delivered to clients. Dr. Hörter suggests ESG research and investment tools should be built on continuous, real-time big-ESG data harvesting such as cognitive language technologies and pattern recognition.
From the regulation side, Simon Howard from The UK Sustainable Finance Association has highlighted the regulatory changes made by the UK and EU regulators. UK regulatory bodies have introduced new rules for banks and insurers to manage climate risks better and pension funds have to consider ESG risks now. EU regulations including Shareholder Rights Directive II, Paris-aligned Benchmarks Regulations and Disclosure Regulations all require financial organisations to incorporate ESG risks into their investment approach and portfolios.
EJ Shin, Portfolio Manager at BlackRock shared her opinions on the approach that asset managers currently take to incorporate ESG into clients’ portfolios. Different clients normally have different objectives and specific needs – some may focus on reducing carbon, while others care more about saving water. Therefore, it is important for portfolio managers to engage with their clients and understand their objectives when structuring ESG portfolios which best meet clients’ needs. There are a large number of so-called ESG portfolios on the market, because ESG has become an extremely strong marketing umbrella. Before making the investments, EJ Shin has suggested that investors should look under this umbrella – check where the underlying ESG data comes from, whether the data has been validated and to understand the objectives of these portfolios.
It is agreed by most asset managers that lack of reliable and long-running data sets is the main obstacle of integrating ESG. Due to the large number of companies that ESG data vendors cover, it is very difficult for them to go into depth and analyse companies case by case. Their standard ESG questionnaire doesn’t suit every company. As Global Investment Megatrends reported, it is meaningless to ask ‘life saving’ sustainable firms like Everbridge who provide mass communications in the event of an emergency whether they use clean technology. Instead of looking into a company’s business model, the box ticking approach of ESG rating vendors can easily mark companies down just because this company’s business does not fit into their standard boxes.
Undoubtedly, it will be a challenge for the government and regulators to address these issues and set up benchmarks and taxonomy for the whole market.