They say that ‘information is power’, but is there enough of it available to show whether sustainability investing works? The problem isn’t really in finding data, but knowing how to process it.
Like all disruptive new industries, SI is challenging established ways of thinking that go back decades or even centuries, and in that regard is a relatively new concept. The world has had since the 19th century to collect data on burning coal, and rather less time for studying solar power or electric cars. So, some investors are naturally skeptical about whether enough information exists to justify expensive new investments in this field.
However, data and information for use in sustainability investing is not only plentiful and easily accessible, it is also growing in its size and scope every day. Indeed, part of the reason why this data myth persists is some investors have become overwhelmed by it, and unable to process it all. As new sustainable projects come online every day, it becomes increasingly important for investors to be able to make sense of it.
The growth of sustainability investing since the 1990s has been mirrored by a growth in the number of data providers and media groups covering the industry. Many specialize in a certain field, broadly operating in three groups. These are gathering new data for use in investment processes; curating or analyzing existing data that can serve as a searchable database; or broadcasting sustainability news and organizing events to spread the word further.
Many specialized data providers now sell environmental, social and governance (ESG) to investors to use in their decision making. Others offer proxy voting services and keep records of investor voting activity at shareholder meetings, which assists with engagement and governance work. Some services now even use artificial intelligence to analyze unstructured or random data and spot trends in them.
Curation firms have emerged to build whole libraries of investor white papers, annual outlooks and think pieces, while specialist media has emerged to cover the industry itself, organize conferences and share information. And some newswire companies cross all three fields, building extensive ESG databases and news archives for their clients. There are also stock market index companies and ratings agencies specializing in SI. RobecoSAM has had a partnership with the Dow Jones group since 1999 when it created the Dow Jones Sustainability Investing World Index. This lists the world’s most sustainable firms according to information gathered by RobecoSAM. Others have sprung up since, including the MSCI Global Sustainability and ESG Indexes and the FTSE4Good Index series. For ratings, specialist companies that rate investment funds according to their ESG credentials among other criteria include Morningstar.
Within the investment industry, virtually all asset managers and banks now have their own in-house sustainability teams to collect data and then use it as part of their investment processes. Robeco uses the annual Corporate Sustainability Assessment (CSA) and twice-yearly Country Sustainability Ranking (CSR) produced by sister company RobecoSAM.
The CSA is a questionnaire sent to more than 4,000 listed companies around the world, including the 2,500 largest. It asks between 80 and 120 industry-specific questions that directly relate to the companies’ operations. For the last collection in 2017, some 60 industries were represented, with more than 600 data points per company.
This proprietary research underpins much of the ESG integration work conducted at both Robeco and RobecoSAM. And because it has systematically assessed the ESG performance of large listed companies since 1999, RobecoSAM now owns one of the world’s most comprehensive databases of financially material sustainability information.
The growth of all this information has created an industry of its own to improve the quality of it and enable investors to make sense of it all. Many companies have been willing to say how they were progressing with Corporate Social Responsibility (CSR) or other sustainability initiatives, but lacked the presentational skills to disseminate it in a meaningful way. The Global Reporting Initiative was launched in 1997 to promote the quality of sustainability reporting around the world, and now has more than 600 members.1
Similarly, the Carbon Disclosure Project is a not-for-profit group that reports on the environmental impact of companies, cities and countries. In 2018, the group released its ‘Global Supply Chain Report’ on emissions. Many other NGOs perform a similar function, such as the Task Force on Climate-Related Financial Disclosures, which provides detailed information on risks. These include changing weather patterns which greatly affect insurers and coastal businesses, among others.2
Indeed, such is the spread of sustainability investing that the European Union is now working to create a level playing field where all present and future participants operate under the same rules. In January 2018, the European Commission published the recommendations of its High-Level Expert Group on Sustainable Finance, including some leading lights in the SI industry, after a year of studying the issue.
This work set out strategic recommendations for creating a system that can “deliver a roadmap for a greener and cleaner economy” across the EU. One of these ideas is to create a common framework, or ‘taxonomy’, that aims to harmonize the definitions within the SI spectrum and set standards for investments. Essentially it wants to define what is meant by sustainability investing, and what is not, since SI means different things to different groups. The final Action Plan on Sustainable Finance will be released on 22 March.3
This action plan builds on other multi-national initiatives to create a common framework for sustainability, particularly in the fight against global warming. These include the final Paris Agreement communique in 2015, a report by the G20 Sustainable Finance Study Group in 2016 and the OECD’s climate investing initiative in 2017.4
So the data is there, and the old phrase that ‘you just need to know where to look’ doesn’t apply – but there remain issues in interpreting it and knowing what to do with it all. Data crunching can help, but this is an issue that many investors are still trying to come to terms with.
1Global Reporting Initiative, 2018
2Global Supply Chain report, Carbon Disclosure Project, 2018; Task-Force on Climate-related Financial Disclosures, 2018
3European Commission, ‘Final report of the High-Level Expert Group on Sustainable Finance’, January 2018
4Cop23 Paris Agreement 2015; G20 Sustainable Finance Study Group reports; OECD, ‘Investing in Climate, Investing in Growth’, 2017