Demand increases for upskilling as regulatory landscape for sustainable investing evolves, according to Refinitiv and ESG Investor webinar panellists.
The challenges of accessing all the data needed to support sustainable investment strategies are widely acknowledged by institutional investors. But experts speaking at a webinar last week hosted by Refinitiv and ESG Investor highlighted skills as a comparable, if not greater, barrier to scalable solutions for asset owners.
“The issues with [ESG-related] data aren’t the heart of the problem. It’s a lack of education. It’s about not having the knowledge and understanding [to best] utilise that data,” said Elena Philipova, Global Head of ESG Proposition at Refinitiv, at the webinar, titled ‘Sustainable Investing: Meeting New Expectations’.
There is plenty of ESG-related data available, with third-party vendors continually improving quality and comparability, alongside regulatory changes and industry initiatives to improve information flows from investee companies. Data always works best when paired with human judgement, which is why education needs to be improved alongside the data itself, Philipova said.
However, while seven out of every 10 investment professionals now use ESG data, only 11% are confident that they are equipped to understand it, according to a recent CFA Institute report. Seventy percent of those assessed said they have an interest in accessing ESG-related training, the report noted.
While 26% of respondents to the CFA Institute’s survey said they have “sustainability experience”, the association’s analysis of over one million relevant LinkedIn profiles found that less than 1% disclosed any kind of sustainability-related skill.
This skills gap is putting pressure on data vendors to, not only provide the data, but contextualise it, Philipova observed.
If asset owners and managers don’t develop their understanding of ESG-related data, then this will “hurt their ability to not only implement and design the right solutions, processes and products, but really start asking corporates the right questions,” she added.
Philipova also emphasised that investors need to be willing to “get their feet wet” and educate themselves to better handle the flood of ESG-related information.
Filling the gaps
There’s only so much asset managers can infer about the current and future sustainability performance of corporates through ESG-related data if gaps in data science and related skills remain unfilled, panellists said.
With many staff having no formal education or training in working with data, asset managers are currently forced to make assumptions where data is incomplete or unavailable. This means relying on other skill sets, such as traditional credit analysis or sustainability expertise.
“There are gaps in the data, meaning we need to make a number of assumptions – especially within fixed income, where we work with a lot of non-publicly listed companies, loan pools and municipals,” said Emily Homer, Fixed Income Portfolio Manager at JP Morgan Asset Management (JPM AM).
AI-driven technologies have gone a long way towards plugging some of these gaps, through its capacity to widen the net and capture a huge amount of information about corporates across sectors and geographies, giving asset managers more material from which to draw conclusions.
Asset managers are taking steps to educate their staff, Homer added, highlighting that JPM AM is setting up ‘learner sessions’ where external and internal participants are asked to share their ESG-related knowledge in an effort to better leverage different skillsets.
“It can feel like a very big topic to get your head around, and quite a scary one for people who have been in the industry for a long time and are only familiar with traditional financial metrics,” Homer said. “Some are still grappling with how to take the ESG impact into consideration.”
Asset owners aren’t expecting a perfect understanding of a domain that’s still in its infancy, argued Kate Brett, UK Head of Responsible Investment at Mercer. The near-term priority is for asset managers to be transparent about their level of understanding of ESG-related data and how it’s informing their investment decisions.
“The asset owner perspective is: ‘We want to be able to report to our beneficiaries in a very clear way’. It’s not just about having data for data’s sake, but it’s how we then use, interpret and share that data so it best serves us and, ultimately, the beneficiaries,” she said.
Panellists agreed that asset owners and asset managers need to collaborate when identifying how best to leverage ESG-related data.
“There’s a strong partnership between asset owners and managers to develop new ESG-related solutions”, emphasised Brett, pointing in particular to the development of index-based solutions such as benchmarks for passive investments.
APAC facing “multifaceted problem”
The work required of institutional investors to effectively address ESG-related risks and opportunities can be particularly onerous in certain parts of the Asia-Pacific region, said Matthew Chan, Head of Public Policy, Regulatory Affairs and Sustainable Finance for the Asia Securities Industry and Financial Markets Association (ASIFMA).
“It’s a multifaceted problem that we’re trying to solve,” he said. “There’s a lot of discussion in Asia about why there’s a need for training, not just in data [analysis and management], but broader ESG issues.”
There is a need to capacity building, Chan noted, particularly when it comes to developing analytical and interpretative skills when working with data from when it’s gathered to when it informs scores and ratings.
“This is an area we’ve really identified as an issue,” he said. “We need to build capacity from mid-level management up to corporate boards.”
A growing recognition of the climate emergency ahead of COP26 is leading to an increased urgency in the Asia-Pacific region to address ESG-related issues and, by extension, investors widening their understanding of ESG-related data, Chan added.
There is a wide variety of countries at different ends of both the economic and environmentally-aware spectrums, he said, meaning it’s more complicated with the APAC region to come together and formulate a standardised plan to enable a (relatively) painless transition to a greener economy.
“In a more developed Asian market, it may not be acceptable to solely rely on natural gas [without sourcing renewable alternatives], but emerging markets in Asia may still be dependent on coal-fired power plants and can therefore only enforce more incremental policy changes,” Chan said.
In this fragmented context, said Chan, there is a need for initiatives such as the Future of Sustainable Data Alliance (FoSDA), launched to help global investors understand the data challenges of ESG and sustainable finance and how different regions can collaborate.
ASIFMA recently partnered with FoSDA to publish research focused on the APAC region, which noted a sustainable financing gap in Asia due in part to a lack of historic ESG-related data, standardisation and policy and regulatory support.
In response, ASIFMA has put forward recommendations, including: pushing for greater convergence towards a principles-based global or regional taxonomy; bolstering policy and regulation to support innovation and technologies that enable ESG and sustainable finance capabilities; and more focus on education and skills to support ESG-related development.
Chan also pointed to a recent report commissioned by Boston Consulting Group (BCG) and published by the Global Financial Markets Association (GFMA), which noted that the global climate finance market needs to grow by US$3-5 trillion in investments per year to reach the US$150 trillion needed to successfully mitigate the risks posed by climate.
“Most of this financing will needed to be funnelled into APAC,” Chan said, noting the progress being made by Singapore and Hong Kong in particular, as green investment hubs, and initiatives being rolled out by China to meet President Xi Jinping’s pledge to achieve net-zero greenhouse gas (GHG) emissions by 2060.
The challenges faced by institutional investors in allocating capital effectively to sustainable investment opportunities are also being addressed by a nascent regulatory framework, panellists noted.
Corporates are being asked to better disclose their exposure to a variety of ESG-related risks and opportunities and how this is impacting performance. Asset managers are required to provide evidence supporting their marketing and labelling of ‘green’ products and services.
Asset owners are continually encouraged to take climate and other sustainability factors into consideration in their investment strategies, both by regulatory reforms, such as the introduction of TCFD-based reporting requirements in the UK, and through the evolving priorities of beneficiaries.
As Brett and Homer noted, asset owners are moving at different speeds, but evidence of a shift in priorities can be seen in a greater emphasis on stewardship and coordinated efforts to decarbonising their portfolios to achieve net-zero emissions by 2050, such as the UN-backed Net Zero Asset Owner Alliance.
ESG-related data is necessary to facilitate these changes, panellists said.
For example, asset managers offering services in the EU that are now subject to Level 1 of the Sustainable Disclosure Regulation (SFDR), and Level 2 from next year, will be reliant on ESG-related data to help justify the categorisation of their green-labelled funds. Having a comprehensive understanding of the underlying data secured from their holdings is vital.
Homer said that changes to regulation has encouraged a positive shift towards a “compliance mentality”, meaning investors are intensifying efforts to understand how ESG-related risks and opportunities impact their portfolios.
In parallel with regulatory compliance, said Brett, asset owners must be flexible and willing to be proactive in tackling ESG-related issues in concert with asset managers and index providers.
“Clients increasingly have expectations that ESG-related data can support regulatory requirements, so asset managers and owners have been working together in order to better standardise ESG-related requests from regulators and policymakers. Currently, managers are having to respond to lots of different, ever so slightly varied, queries, which makes it more challenging,” Brett said.
As client and regulatory expectations continue to evolve, ongoing education and training will be needed to develop and reinforce the skills needed to interpret data and implement sustainable investment strategies, panellists said.
“It’s important that we don’t look at ESG-related data as a completely separate beast. It’s a data set just like any other data set investors work with on a daily basis,” Philipova said. “Although it requires investors to learn how to speak a very different language, it can be managed just like any other data.”