ESG information buffet can confuse hungry investors

Investors hungry for information about environmental, social and governance investing are encountering a sumptuous buffet but not always feeling nourished.

Investors considered ESG factors across $17 trillion in professionally managed assets in 2019, according to US SIF, and the number of ESG products and amount of ESG data are soaring.

But a report released by Capital Group Wednesday during the Schwab Impact virtual conference shows that people are still struggling to implement ESG for a wide range of products.

“There’s so much information available to investors that, actually, the proliferation of data is becoming quite daunting,” Jessica Ground, global head of ESG at Capital Group, said during an Impact session. “Part of the challenge is that sometimes this data is telling you different things about the same company or about the same product. There’s more ESG data than ever before, but it’s not agreeing on what is good.”

In Capital Group’s survey of 1,040 global investors in June, 53% said the biggest challenge in incorporating ESG data, ratings and research in their investment decisions is a lack of consistency in ESG scores. Limitations on ESG scores caused by varying company disclosures was cited by 50%, while 45% pointed to difficulties in interpreting and analyzing third-party data.

Even the two of the most prominent ESG ratings providers — MSCI and Sustainalytics — differed on ESG scores for the same universe of companies, Capital Group found.

“The number of times they agree on what is good or bad is incredibly low,” Ground said. “If these information providers that have made a business about defining ESG can’t agree what is good, it’s not really surprising that a number of you feel that greenwashing is very prevalent in the asset manager industry.”

Ground gave an example of the struggle to find information on one important ESG factor — human capital.  

“Everybody will say employees are really important and then even figuring out something like average salaries … is incredibly difficult,” she said. “If you’re saying your people are your greatest asset, we’d kind of like to be able to kick the tires on it.”

The Securities and Exchange Commission is working on proposals that would require public companies to disclose climate risk and human capital factors that could affect their operations and financial performance.

SEC Chairman Gary Gensler has said the goal is to make climate and other ESG disclosures consistent and comparable among companies. Republican lawmakers have opposed mandatory ESG disclosures, asserting the agency is pushing a political social agenda.

Howard Coleman, chief investment officer and general counsel at Coldstream Wealth Management, said ESG disclosure would have to vary from industry to industry but should be consistent for companies within a sector.

“A uniform set of disclosures … across industries is really critical, and that’s just what’s being developed now,” he said during the Impact session.

Coleman stresses to his clients that they don’t have to sacrifice investment returns when using an ESG strategy.

“It’s one of the biggest misconceptions that some of our clients have,” he said. “Over time … [ESG investing] will either outperform or perform equally to the markets.”

The key to ESG investing is to use it throughout a portfolio instead of relying on one fund or one ESG score, Ground said. She compared the best approach to leading a healthy lifestyle based on diet, exercise and regular checkups instead of just asking your doctor for a particular medicine.

“We believe that building healthy and sustainable portfolios requires a holistic approach, one that integrates sustainability into every aspect of the research and portfolio construction process rather than being a stand-alone or just an add-on at the end of things,” Ground said.