The problem
Since Trustee boards are the ones who set strategic objectives for how members’ money should be invested, it is important that they have a clear understanding of the metrics used in interpreting ESG data. Yet, because ESG investing is a complicated area and data quality so sketchy, it is understandable that a good proportion of Trustee boards are confused in how to approach and interpret the data for their investment portfolio. Many Trustee boards are unable to set an effective target or to pick a useful metric because of the many different methodologies and metrics used by providers. This makes life far more complicated than it should be! These different metrics and methodologies are due to providers competing with one another and a lack of underlying, reliable data in the first place.
The lack of reliable data requires a significant amount of interpretation which leads to many different metrics with different emphases. No wonder pension investment executives have trouble identifying the most useful or applicable metrics for their fund. As a result, many pension investment executives spend more time gathering and reconciling data than they do on preparing and making ESG investment decisions.
The solution
The obvious solution to this problem is to simplify. There is no doubt that if there is clarity and consistency of the metrics in the space then this will help to give Trustee boards clarity in setting ESG objectives. It is also vital that investment teams communicate these metrics straightforwardly by focusing on a small number of the key ones most relevant to the pension fund. Communicating a handful of key metrics will improve decision-making.
Reliable data will not only help Trustee boards to articulate a strategy, it will also help them monitor and evidence the progress of their strategy. For example, if a pension fund’s goal is to be net-zero by 2050 or to fully decarbonise their portfolio, using a set of a few ESG metrics which highlight these areas will help them see whether they are in line with this goal.
There is therefore a two-stage solution to helping Trustee boards articulate an effective strategy. The first stage is data becoming more reliable in the first place, through improving the transparency of companies and in turn building up a database of accurate reported data. The second stage is for the investment teams of a pension fund to communicate a few clear metrics of this data, which can be used by Trustee boards to articulate an effective strategy and then monitor its progress in the long term.
The ‘Spotify’ of ESG data?
Arabesque have designed a free ESG cloud platform based on the ESG data of around 8,000 public companies (plus a growing number of private companies) which provides raw unfiltered data and ratings. The platform also enables companies to disclose data directly on the platform and allows engagement between businesses and investors. This amount of data means that investors can concretely see the direction of ESG investing across their entire portfolio in a consistent manner and this in turn creates standardised reporting which can then be used for investment decision making and the setting of strategic sustainability targets.
If you would like to know more or be put in touch with someone from Arabesque, then please get in touch with us.
