ESG Global Study 2021

Jessica Ground is Global Head of ESG at the Capital Group. This post is based on her Capital Group memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Global investors strongly prefer an active approach to ESG. Threequarters use active funds to integrate environmental, social and governance (ESG) issues — more than double the proportion using passive funds and trackers. Rather than investing in funds that merely screen out unethical sectors, investors want managers to identify and manage ESG risks and opportunities through bottom-up security selection and fundamental analysis.

Further underlining the preference for active management, nearly half of investors point to exercising voting rights and having regular meetings with senior executives at companies as key engagement tools. Investors appear to be looking for a holistic approach to ESG that encompasses all stages of the investment process.

The importance attached to qualitative analysis reflects a need for better ESG data and information. Investors point to a lack of robust data as a top barrier to greater ESG adoption. Issues with the quality and consistency of data pose particular problems throughout the investment journey. Investors say the uncertainty around the reliability of ESG scores is the greatest hurdle when incorporating ESG data, ratings and research. And one-fifth of respondents identify lack of consistency among different rating provider scores as the top implementation challenge.

This is precisely why active management is so important. The problems created by a lack of consistent and accessible data can be addressed through an active approach with an emphasis on proprietary research. This approach goes well beyond scoring systems to focus on fundamental analysis and rigorous risk management.

Data can also be the key to unlocking greater opportunities for ESG-focused investing. Asset managers, again, can play a decisive role in this respect. Nearly half of investors say greater transparency in ESG fund reporting frameworks and data availability would most encourage them to increase their ESG focus.

Investors believe the most important element of fund sustainability reporting is a clear explanation of the role that ESG plays in the investment process. The second most important item they look for is information on specific E, S, and G factors — and nearly half their focus is allocated to environmental issues.

More transparent fund reporting is seen as an effective tool in addressing greenwashing, which refers to when companies use superficial or insincere tactics to show concern for the environment. The challenge is sizeable — almost six in 10 global investors think greenwashing is prevalent within the asset management industry. Concerns are more pronounced among ESG sceptics, indicating that worries over greenwashing could be strong barriers to wider ESG adoption.

Investors think regulation can help stem the tide of greenwashing. Nearly one in two say setting minimum regulatory standards for investment products and services would help tackle greenwashing. But global investors are looking for a common set of global rules and standards to replace the current disjointed regulatory framework. Nearly half (45%) of investors think harmonising global standards, taxonomies and metrics should be the top ESG priority for national regulatory frameworks

The complete publication is available here.

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