The coronavirus outbreak has increased the need for more granular ESG data. However, such data are still difficult to collect as they are often not disclosed by companies. This needs to change fast in anticipation of upcoming EU rules, said participants in a webinar on the topic organised by Luxflag on Wednesday.
The pandemic has shone a new light on the importance of worker safety, for example, noted Leslie Swynghedauw , Vice President ESG Research at rating provider MSCI. ‘Covid-19 changed the perception of what is a dangerous job’, she said. Before the pandemic, few people would have considered close proximity to colleagues a serious health risk, but the pandemic has radically changed this perception.
‘So we are for example now integrating physical proximity to other workers as an additional criterion for worker safety’, she said. ‘We are also assessing the steps companies have been taking to ensure safety of customers and workers as they are reopening. This is not a part of our standard ESG risk assessment,’ she added. But it has become so, thanks to the pandemic.
Another social criterion that has received extra attention during the pandemic is staff retention, noted Ophélie Mortier, Responsible Investment Strategist at Degroof Petercam Asset Management. ‘Because of Covid we realised we should not only check whether a company has a talent management programme, but that it’s important to also really to dig into this. For example, we want to know how a company makes its employees loyal to it,’ she said.
Data quality
However, Mortier acknowledged it’s difficult to measure such granularity in a simple score as provided by rating agencies such as MSCI and Sustainalytics. ‘Providers have a big challenge in covering the whole universe. They often can’t provide as many details as we want,’ she said. ‘It is not enough for us to know whether a company has a high or a low ESG-score since we need to understand why this is the case. Therefore we combine their data with our own research.’
Hans-Ulrich Beck, responsible for product strategy and development at Sustainalytics, acknowledged there is ‘room for growth in the data we collect’. However, he stressed, the reason his company is often not able to provide the data needed is that the right data are simply not available.
‘ESG data are often not audited, and we have to deal with this reality. The quality of the data gathered by companies is often poor, this is the issue that permeates everything’, Beck said. ‘There’s also still no consensus on how to measure ESG impact and ESG risk.’
Beck comes up with the example of Tesla, the electric car company which is in part of many sustainable equity portfolios. ‘Many investors view their products as sustainable because they produce zero-emission cars.’ But that’s only one side of the coin, he argues. ‘On health and safety measures, carbon emissions and other pollution during the production phase, they are untransparent. How do you combine a product with a positive impact with poor operational practice? That’s not an easy question to answer.’
Green Taxonomy
But maybe it will be. Possibly the EU Green Taxonomy will provide more clarity on the criteria of what investments exactly can be classified as sustainable and why.
‘The taxonomy is an incentive for companies to reduce greenwashing and publish more ESG data,’ said MSCI’s Swynghedauw, who added she is also grappling with a lack of ESG disclosure by companies. ‘It will be interesting to see how companies will fill that gap.’
Asset managers need access to companies’ granular ESG data when the Regulation on sustainability-related disclosures in the financial services sector comes into force in March next year, said DeGroof Petercam’s Mortier. ‘We need this because we will have to report about raw company data.’ The scores and decisions provided by ESG providers are not sufficient to comply with the upcoming regulations, she stressed.
MSCI is currently working to address investor concerns by developing tools for investors to measure the alignment of their portfolios wih the EU’s Climate Transition Benchmark, according to Swynghedauw.
But asset managers should also take an active approach now as the EU’s sustainability regulations are taking shape, said Mortier. ‘We have to be active in answering all consultations to make sure the new taxonomy will incentivise green investment rather than it being just an administrative disclosure burden.’