By Marion Leslie, Head of Financial Information, Member of the Executive Board, and Executive Board Lead for Sustainability at SIX Group.
Last year saw record inflows for ESG in passive investing, as $391 billion poured into ESG ETF assets, up nearly 100% from 2020 and ten times as much as in 2017, according to Statista research. There is no doubt that the spotlight on sustainability has had a major impact in redefining the fundamental goals of millions of investors.
But does the current ESG data landscape reflect the needs and expectations of the next generation of investors, which increasingly demands higher overall confidence in their investments, with higher quality information, greater transparency and more authenticity, and less hype?
The next generation of investors have a different set of goals to those preceding them. To date, the overwhelming focus of investors has been a desire to generate alpha. However, research from the Saltus Wealth Index shows a generational divide – it demonstrates a clear correlation between age and likelihood to invest in ESG, green, and impact funds. As wealth passes to younger generations, they often look to redeploy it to areas more aligned with their own values and investing philosophies.
It follows, therefore, that this new wave of investors demands more granular insights into the impact that their investments have from an ESG perspective. The information that they require pertaining to their portfolios is broader and deeper than ever. The challenge facing financial institutions is that this places more demands on the availability and quality of data they provide.
While interest in ESG investment products has clearly gained momentum, there is still a lack of availability, clarity, consistency, and comparability where ESG data, ratings, and metrics are concerned. Data transparency issues investigated and highlighted in a 2021 report by IOSCO have made it onto the regulatory agenda and now feature as strategic priorities in ESMA’s ‘sustainable finance roadmap 2022-2024’ issued in January 2022.
With increasing investor demand for sustainable and impact investments, there is no denying that this ESG data issue must be addressed. The question is how.
With advancing digitisation technologies, fintech and AI-enabled analytical tools, and alternative data, new insights are becoming available, in real time. ESG data cannot be treated the same as other types of extra-financial information – it is a developing, unstructured space, that requires a more tailored approach and the infrastructure to tag and interconnect financial and extra-financial information.
The real benefit of these ‘future-fit’ datasets is that, by their nature, they go beyond demonstrating an exclusively past-performance track record. They provide vital colour on the strategic priorities of companies, any controversial activities with which they are associated, and systemic concerns. They provide forward-looking elements to better assess ESG considerations of business areas and activities.
An example of this would be an environmental factor such as climate risk pathways. These can provide an extremely valuable insight into the transitionary trajectory of a company. However, they would not necessarily be factored into traditional ESG scoring metrics if they are only considering inherently retrospective or current-state information. Those responsible for carrying out ESG investment analysis are empowered by better, more granular data to establish a more complete and future-proof picture when assessing an investment opportunity.
The firms that are able to provide and aggregate more advanced ESG data sets are the ones that will also be able to engage most effectively with the next generation of investors.
Marion Leslie is Head of Financial Information, Member of the Executive Board and Executive Board Lead for Sustainability at SIX Group.
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