An increasing amount of capital is flowing into Environmental, Social, and Corporate Governance (ESG) products, with more than $30 trillion invested in ESG assets across the globe . This seismic shift is happening in real-time across the investment universe.
While one can argue that the shift to ESG-based investing is critical to the long-term sustainability of society, capitalist incentives still drive this movement. Investors are looking to outperform the market, and asset managers are looking for an edge over their competition. To achieve this, asset managers need better information, the ability to accurately translate that information into indicators of future performance, and the means to act on that translation.
Investment management strategies are diverse, but there are four nearly-universal fundamentals: seek alpha, reach a better understanding of an asset’s future performance, build portfolios to match clients’ goals and incorporate all relevant regulatory concerns. However, big data, speed of information, and AI are making it more challenging to differentiate on these four fundamentals. Enter ESG data.
Capitalizing on ESG Data
ESG data today is disparate, qualitative, and far from perfect. This has created headlines around the subjectivity and non-correlation of many ratings agencies. As such, it has cast doubt on the zeitgeist of the investor community, especially in the US. Different ESG rating methodologies focus on different topics, use varying input sources, have a range of quality standards, and cover different company profiles (size, region, industry, etc.). EcoVadis, for instance, uses a rating methodology that covers 21 CSR criteria across four themes: Environment, Ethics, Labor & Human Rights, and Sustainable Procurement. Generating returns, however, is not simply a matter of having ESG data. Asset managers must know how to use such data, following the same value-creation path they have always sought: attaining better information, translating this information into indicators of future performance, and finding a means to act on such knowledge. The variance in ESG is therefore not solely negative but an opportunity for asset managers to differentiate themselves.
Getting Ahead of the Competition with the ESG Officer
At the epicenter of all of this, in a growing number of firms, is the ESG Officer. In an age where data has overtaken oil as the most valuable resource in the world, the ESG Officer is the interpreter of this uniquely valuable dataset known as ESG. Ubiquitous access to nearly perfect datasets, such as historical financial performance, quality, and brand value, is spreading. The challenge of correlating ESG performance to financial returns is one that has not been absolutely solved, in part because it changes on a daily basis. This creates an incredible opportunity for those firms who understand the changing landscape to harness their unique power and outperform their competitors. The ESG Officer is the expert in understanding different ESG datasets, how to interpret them, how they align with the firm’s strategy, and therefore how best to act. It will be up to those in this role to read through the wealth of complex, dynamic data to help predict performance, optimize ESG assets, and finally get ahead of the competition.
Interested in learning more about EcoVadis’ sustainability rating methodology? Visit here.
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