Financial advisors need to take care to gauge client preferences around green and social investing and then the investment products they recommend must keep their Environment, Social and Governance (ESG) promises. Failure to do so carries risk. Accurate, pertinent data is the key. Laetitia Hamon, head of sustainable finance at the Luxembourg Stock Exchange sees the industry making solid progress.
Q: Is there a lack of quality ESG data?
It’s not really a lack of data that’s the challenge, it’s more a lack of standardised, comparable and verified data. Maybe for emerging markets and SMEs there are gaps, but in general asset managers are awash with data. They often buy from three, four, or five sources, as well as collecting data themselves by engaging directly with companies. A key challenge is to develop in-house assessment procedures for the data and providers’ methodology and then finding ways to integrate this into investment processes. This approach gives a broad, holistic view, as well as providing added coverage against ESG risk. It’s important to avoid shortcuts and over-simplification in data interpretation. Simple rating scores might be a good starting point, but I’m not sure it’s enough to understand how sustainable a company is in reality.
Q: How are corporates managing the reporting challenge?
Larger firms have been producing sustainability reports for the past decade and have increasingly been answering questions from investors, ESG data providers and index providers. Yet substantial challenges remain, such as which sustainability standards to follow from the increasing number being made available, including the GRI (Global Reporting Initiative), the Task Force on Climate-Related Financial Disclosures (TCFD), the upcoming International Financial Reporting Standards (IFRS) Sustainability Standards Board and more. Then on the investor side, they need to make sure that the data is reliable, that it has been verified and is sufficiently forward looking.
Q: How reliable is corporate reporting today?
One can have reasonable confidence in the reliability of company-level data being provided by corporates. The CSRD (Corporate Sustainability Reporting Directive) is helping as it will require reporting of double materiality which takes into account current practices and also ESG impacts and ESG risks. On top of that it will require the data to be verified by auditors. It’s important to note that this is a brand new way of working, as traditional financial data is backward looking. It’s a challenge to produce and audit this often qualitative information that is often based on a series of assumptions or judgments.
Q: How can the industry communicate these subtleties to clients?
Financial advisors are key in the investment chain and they need to be well trained to advise on sustainable products. It can be time consuming enough working through the financial characteristics of a product and it requires a new perspective and more time to explain sustainable characteristics. Advisors may need to enter into discussions about personal values to understand client preferences and match these to appropriate products. There is a choice to be made about how far advisors wish to go with these conversations. They can receive different answers from the same person depending on how questions are asked. So training is vital, as there is a knowledge gap among some advisors about how to describe products, how to sell them and how to explain the environmental and social impact of such products. Some private banks are working on IT-based questionnaires to help define client preferences, and it will be interesting to see how this work progresses.