Asset managers’ confidence in ESG tools and metrics grows, but significant data gaps remain.
Despite the growing prevalence of social factors in investors’ decision making, a lack of quantifiable data hinders its incorporation into asset managers’ passive ESG strategies.
Rick Redding, CEO at the Index Industry Association (IIA), told ESG Investor that social factors are “clearly” becoming more important, but said there are “real data challenges” to be overcome.
The New York-based organisation’s third annual ESG survey gathered responses from 300 CFOs, CIOs and portfolio managers across France, Germany, the UK, and the US.
Responding to the survey, 62% indicated that social criteria are a core component of all, or part of most portfolios, marking a decline from 69% the previous year.
Noel O’Halloran, CIO at institutional asset manager KBI Global Investors, told ESG Investor that the governance component of ESG has the most measurable data, followed by environmental data.
Redding shared similar sentiments, noting that climate has the “most quantifiable data globally”, with sparse data on social.
O’Halloran said availability of social data was currently “very low”. KBI Investors has 30% of its investments in Europe and equal level of allocation in the US.
Redding underlined the “need for quantifiable data” on social, with 54% of respondents to the IIA survey admitting they found it difficult to evaluate the social performance of companies.
Stronger social data stateside
According to the report, US asset managers are “much more likely” (74%) to incorporate social criteria in ESG strategies compared to asset managers in other jurisdictions, such as the UK where just 52% currently do so.
Redding cited a lack of available data as a key reason for fewer UK-based asset managers incorporating social criteria into ESG strategies.
“Of all the countries that we deal with globally, the US probably has the best data on social factors,” he said. “In many countries, including most European countries, there’s privacy laws, while in the US employers actually collect quite a bit of information on employees,” Redding noted.
“It’s the one place I think the US may have an advantage over pretty much every other jurisdiction.”
The US Securities and Exchange Commission (SEC) Human Capital Disclosure Rules came into effect in November 2021, which require public companies to disclose information about their workforce.
The metrics that companies are required to disclose include workforce diversity, equity and inclusion-related policies and practices, the number of employees deemed to be full-time, part-time, and seasonal, as well as information about the company’s human capital objectives with how the firm manages, develops, and retains its workforce being encompassed.
Currently, the reporting on human capital under the Human Capital Disclosure Rules are narrative, but investors are expecting the SEC to propose more prescriptive and standardised disclosure requirements later this year.
The SEC is also expected to finalise its much-anticipated climate disclosure rules though the proposal has received significant criticism, chief among them that Scope 3 requirements – which involve reporting of carbon emissions of customers and suppliers – present liability concerns and data collection and measurement challenges for companies.
“The highest impact of any of the regulatory actions in the survey was the proposed SEC disclosure rules,” said Redding.
While lack of social data is a particular issue in the UK, the government’s Department for Work and Pensions (DWP) is attempting to address it with the launch of its its Taskforce on Social Factors (TSF).
Set to run for a year, the TSF aims to supports pension scheme trustees and the wider pensions industry with the identification of reliable data and metrics, which is one of its three key objectives.
Confidence in tools and metrics
The number of asset managers that see ESG tools and metrics as effective has increased from 66%-69% in 2021 to 85%-87% in its latest survey.
Redding said he was “surprised” by the significant jump, given that many respondents cited gaps around a lack of data standardisation (30%), insufficient quantitative data (29%), and lack of agreed ratings and methods by providers (24%).
Despite this, asset managers said ESG data quality has got better, but Redding warned the results show that there’s “still a lot more that needs to be done on the data side”.
Redding said the three years of IIA annual surveys presents a “clear message” that ESG data is improving year-on-year, which he expects to continue.
“I feel like ESG investing is in earlier stages than people think because the data has to catch up with what investors want, and I think we are going through that process now,” he added. “Within the next five years I think you’re looking at a world that has a lot more quantifiable and reliable data.”
This week, the International Sustainability Standards Board’s (ISSB) formally launched its first two standards. The standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.
Emily Pierce, Associate General Counsel and VP of Global Regulatory Climate Disclosure at climate management and carbon accounting platform Persefoni, told ESG Investor that the ISSB standards will “more consistent, comparable, and reliable information” to support investment decisions.
IOSCO is conducting an independent assessment of the ISSB standards, with its approval necessary before individual national securities regulators can adopt the standards into their respective regulatory frameworks.
Defying US political headwinds
More than eight in ten (81%) of asset managers that responded to the IIA survey said that ESG has become a greater priority to their investment strategy over the past 12 months. Over half (54%) said ESG had become “more” of a priority, while 28% said it had become “much more” important.
Further, 88% of US managers surveyed said that ESG had become more of a priority over the past year. The US has seen an increase in anti-ESG political activity, with more than 100 anti-ESG bills filed by Republican legislators this year already, more than doubling the 39 filed in 2022.
Republican senators have also demanded further information on the SEC’s proposed climate disclosure rule requiring public companies to disclose climate-related information in their registration statements and periodic reports, which they have argued will “unnecessarily harm consumers, workers, and the US economy”.
“I was expecting to see a bigger disparity between the US and Europe and that was absolutely not true,” Redding said, adding that the US numbers were much stronger than anticipated.
“As the data gets better it means investors have more confidence in the products that asset managers are putting together to sell to investors,” he added. “I think that trend continues regardless of regulation, regardless of where political fights may be.”