Non-financial reporting: the key to ESG
Stefano Torti, Group Head of Asset Management & Advisory at Banque Havilland
As younger investors take to the field, fund managers would do well to integrate ESG criteria into their strategies, aligning themselves with the interests of socially conscious investors and making an impact in emerging markets. For this, high-quality, non-financial reporting is vital.
Sustainability, active engagement, and impact investing are central topics when it comes to distributing financial products to retail investors, particularly the newer generations. These young investors tend to be more engaged and hands-on, preferring to invest on an advisory rather than a discretionary basis. Often highly inquisitive and well-informed, they want to know the good their capital will do.
Integrating sustainability preferences, sustainability risk, sustainability objectives, impact investment, and reporting can be quite complex due to the proliferation of standards, labels, regulations, articles, and jargon. It is hard enough for professionals to make sense of the complexity and much more so for retail investors who are eager to translate their convictions and preferences into sound financial investments. Financial institutions need to work that much harder to provide these investors with clear, reliable advice and data.
Moreover, it is to note is that Environmental – the E in ESG – is what attracts most investor interest when it comes to ESG. There is a sense of urgency when it comes to the climate, a feeling that we need to act now. Meanwhile, investment funds focused on the S (Social) and G (Governance) are much fewer by comparison. This paucity comes from both the manufacturer side as well as the demand side.
Meaningful ESG investment relies on non-financial reporting
In recent years, there has been significant news coverage of greenwashing – when companies or funds proclaim their products to be ESG aligned while the truth might be quite the opposite. As abominable as greenwashing is, assessing sustainability performance or sustainability risk is not a walk in the park, especially compared to assessing financial performance, which is fairly straightforward. The key is to obtain and provide to investors complete and in-depth non-financial reporting that will detail the ESG strategy, achieved results and long-term objectives.
For instance, a client investing in an impact fund should expect an impact report at the end of the year, which covers both quantitative and qualitative aspects on how the fund was managed, the underlying companies, the fund level of engagement of the fund vis-à-vis its investments, and which results were achieved through the capital allocation. Because there is a surfeit of data out there, it can be difficult to estimate how much capital has helped, even more so when investing in small and medium-sized companies that lack the data-compilation resources and communication expertise. In these cases, patience, openness, and a willingness to engage are essential.
Many external providers that help to assess ESG performance. Many Fintech firms as well as more traditional data providers do their best in compiling pertinent figures and data. However, a lack of consistency and uniformity among these providers can be a source of confusion. A stock may be given a triple-A sustainability rating by one provider and a B by another. At the end of the day, using external providers does not relieve fund managers and advisors of the obligation of doing their own homework.
ESG investing in emerging markets: an exciting opportunity despite the challenges
For many investors and fund managers sensible to sustainability topics, the most exciting part of ESG investment is the potential impact on emerging markets, which now contribute a majority of global CO2 emissions. Capital markets in these economies are less developed, and many local regulators have not done as much as their counterparts in Europe, for example, to address sustainability problems or redirect or incentivize capital towards sustainability. If transition is not happening locally, a major contribution can be made by international investors, who are strongly positioned to help to push companies and financial actors in emerging markets to understand what the requirements are for European-based investors – and to guide them toward addressing ESG topics more thoroughly. Admittedly, it may be easier to invest in a European ESG fund, but allocating capital to emerging markets, especially when it comes to achieving sustainability objectives, is far more impactful. For many investors, it is also more rewarding.
ESG in emerging markets
Investing with a focus on ESG in emerging markets presents a challenge and an opportunity. Capital markets and sustainability regulations in such markets are often less developed, so more work must be done with local management. However, international investors are well positioned to push companies in emerging markets towards sustainability and dramatically help to improve their ESG performance.