How Investors can Navigate the ESG Data Landscape
Investors are increasingly turning away from so-called sustainable growth investments due to concerns about environmental, social and governance (ESG) issues. The financial services sector is data-hungry when it comes to traditional sources of information on companies' environmental and social performance, and ESG funds have seen a "rare" outflow from the industry.
Asset management firm Bernstein noted that the first week of March "Marked a rare outflow from ESG funds." No one can say for certain whether this is a brief blip - perhaps affected by inflation or other macro factors - or a sign that the staggering growth of ESG investments is no longer sustainable.
Research has consistently shown that even respected rating agencies assess companies differently on ESG factors, making it difficult to determine which ratings are the most relevant and predictive. In many cases, investors simply do not have the time, budget, or skills to harness the full potential of ESG data. Investors need to collect more data, and the financial services sector is data-hungry when it comes to traditional sources of information.
The survey found that investors who reported the lowest returns from their ESG investments were the ones who relied entirely on ratings from external agencies.
The investors who used both in their decision-making reported the highest returns from their ESG investments - 6.9% higher than the S&P 500 in a bull market.
Looking a level deeper, we found even more differences in investment performance based on what data firms use to create their internal ratings.
Source: Global Baking & Finance