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Expect quotas in the next decade of ESG

ESG investingQuotas are likely to be introduced within the next 10 years of ESG investing as the space continues to evolve, according to panellists on a recent webinar held by Funds Europe and Backstop Solutions Group.

It is only a matter of time before governments begin implementing quotas in order to drive ESG-led change though acquiring data, according to Renewity head of research Stephan Breban.

Speaking on a Funds Europe webinar on 23 November on fund allocators and ESG, sponsored by Backstop Solutions, Breban said: “As [ESG] becomes more mainstream you’re going to have the education piece that comes with that.”

Breban pointed to an example of data that displays the merits of ESG but has only been available in more recent years because of societal change.

“If you asked people 10 years ago about women on boards, they’d have said there is no evidence that women on boards make any difference to performance – but of course they would’ve said that, because there were no women of boards to count,” he said.

“Now we have a duration where we have women on boards, sometimes more than one woman on a board, and we have data on the performance of companies where there are women of boards.”

Breban said data on ESG must be collected before it can be used to prove anything, and that one way to do that is implementing quotas.

“[Quotas] are a very emotive area, [but] it’s the quotas system in Europe that got many women on boards, and until that more widely happens you have to say that the current system is not working,” he added.

The head of research has already seen interest in such a system from Goldman Sachs, which has said that if a company does not have a non-binary person, a woman or a person of colour on its board, the investment bank will not represent that company for an IPO.

“Goldman Sachs aren’t perceived to be the most warm and fluffy organisation, [so] I suspect there’s a financial motivation behind that,” he continued. “When Goldman is doing something, I’m inclined to believe they’re doing it for money, so perhaps others should look to do it as well.”

ESG to become the norm
Fellow panellist Declan Sheehy, head of EMEA asset owners at Backstop Solutions, said in the next 10 years ESG is likely to become the norm in investing. He said ESG-led changes in the financial industry would likely become as ingrained as those seen following the financial crash in 2008.  

“If you look after the financial crisis there was a lack of confidence in the industry, so after that we had chief compliance officers, chief risk officers – we built a whole infrastructure to give security to investors,” he said.

“So, what I would suggest in the future, what has evolved since the financial crisis in terms of risk and compliance, I would see the same for ESG and the environment. We’re seeing already chief sustainability officers, still portfolio managers, but also a dedicated team that looks at renewability and sustainability around outputs. I would expect in 10 years it will no longer be ESG, it will just be practical investing.”

The challenges of data sharing
In many ways ESG is still in its infancy, with data gathering, consistency of data, and data sharing among relevant parties being the three enduring concerns among fund managers and allocators.

During the webinar, panellists discussed issues around data sharing, and how challenging it can be to find ESG metrics, particularly as there is data divergency among major providers that can result in each rating a company’s ESG credentials very differently. 

On how technology can be used to tackle issues around data sharing and ESG metrics, Sheehy said technology can enable team collaborations across “all moving parties”. In this case, referring to fund managers and allocators, and their connected parties like legal teams.

“[Tech] can also be used to retain the institution knowledge,” he continued. “A lot of these investments are long term, they’re 10 to 15 years, and technology can support that to make sure the process runs uninterrupted, while potentially the staff may change.”

Efficiency in moving data from a fund manager to an allocator is another area in which technology can play an important role, Sheehy said.

“The movement of data between key parties should be smooth and efficient, and the ultimate goal [behind that is] to be able to provide better insights,” he added.

Active managers actively engaging
Turning to what steps can be taken to move ESG investing forward, Amundi deputy chief risk officer Allen Xiao said engagement from asset managers is crucial.

“Asset managers do have a vested interest to make use of active engagement, because ultimately the concept of active management rests on the concept of active engagement, and that actually helps them better engage with clients,” he said.

Xiao said active managers can represent the view of shareholders via the proxy voting process, and push for change in that way.

Change has already been enacted like this, he said, pointing to the recent battle between activist investor Engine No.1 and Exxon Mobil. Engine No.1 was concerned about Exxon’s environmental impact, and ultimately was able to persuade Exxon shareholders to elect three of its four nominated directors to the oil and gas giant’s board, where they can drive change.

“We need to vocalise the right view to influence the management,” he continued. “It’s a long-standing battle. Often when we talk about ESG, there’s always lots of geopolitical reasons not to move forward fast enough… but it’s important to align different interests from different parties.”

The ‘What Allocators Are REALLY Doing About ESG in 2021' webinar in association with Backstop Solutions Group is available to watch here.

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