ESG may have gone mainstream, but many of the largest asset owners in the U.S. and Europe aren’t satisfied with their environmental, social, and governance index providers.
Only 23 percent of investors are satisfied with the index they’re using, according to findings from a GaiaLens survey of 200 of the largest asset owners in the U.S. and Europe that were exclusively provided to Institutional Investor. Among respondents, the most commonly used indexes, in order, were the Global Reporting Initiative Standards, the United Nations 17 Sustainable Development Goals, and the Task Force on Climate-Related Financial Disclosures (TCFD).
“One [globalized] consensus about ESG rules…we’re quite far away from that,” Seb Kirk, co-founder of GaiaLens, told Institutional Investor. “You can pick and choose which [standards] you want to play with. We aren’t any closer to being able to say we can compare apples to pears.”
GaiaLens is an ESG data provider for asset owners and asset managers. For the survey, the firm commissioned investment market research agency Beresford Research to conduct phone interviews with 200 of the largest asset owners. Half of respondents were based in the U.S.; the other half were located in Western Europe and the U.K.
Roughly half of the respondents were investing on behalf of corporations, while the other half worked for pension plans, public and government plans, endowments, and foundations. Over half of the respondents were chief investment officers; the other half was split between sustainability and ESG integration executives.
Twenty-eight percent of asset owner respondents attributed their discontent with their current ESG reporting frameworks to a lack of clarity, transparency, and robustness in the methodologies used by the providers. Roughly 20 percent said their dissatisfaction stemmed from an imbalance in the amount of attention paid to the “E” element of ESG reporting, claiming that index providers have largely ignored the “S” and “G” factors.
Fourteen percent of respondents told GaiaLens that “none [of the providers] are focusing on the areas of ESG which most concern us,” while 15.5 percent said that ESG indexes were yielding investment performance below their investors’ expectations.
Kirk said that some of this discontentment is due to the fact that unlike the social and governance components of ESG, the environmental aspect is much easier to quantify. “[Environmental impact] is a metric you can measure,” Kirk said. “But in terms of social issues, it’s quite hard to quantify how well a company is doing in terms of human rights.”
In general, Kirk said, asset owners are significantly slower when it comes to adopting ESG than managers are, particularly when it comes to scoring their own processes. For example, while 60 percent of the asset owners surveyed are building dedicated ESG portfolios and are offering ESG fund options, they’re still lagging in their ESG-related due diligence. Only 25 percent of respondents said they've integrated ESG scoring into their existing investment manager selection processes. Kirk speculated that this may be because managers feel more pressure than owners to engage with ESG.
Additionally, skepticism about the ability of ESG indexes and funds to generate alpha plays a large part in the slower rates of adoption. Thirty-three percent of U.S.-based respondents, for example, said they believed that ESG was negatively impacting returns, while 17 percent of European respondents said the same.
Still, growing demand for ESG data and transparency is putting pressure on public companies to provide better disclosures. In a Deloitte survey of 300 senior finance and sustainability professionals released on Monday, 57 percent of respondents said that access to data that is accurate and complete was their greatest challenge when it came to disclosing ESG information about their firms.
According to the report, the dearth of accurate and reliable data may be attributable, in part, to inadequate technological resources. While technology is an integral part of the ESG reporting process, 92 percent of Deloitte survey respondents said that they believe their organization needs to invest more in technology to address demand for “consistent and reliable measurement, reporting and disclosures.”
Jon Raphael, national managing partner of transformation and assurance (ESG) at Deloitte, said in a statement that the companies that ultimately succeed will have “the right mix of skilled professionals, streamlined processes, and dynamic technology to address stakeholder expectations for high-quality ESG disclosures that instill trust.”
The full GaiaLens report is expected to be published in June.