The ris­ing cost of so­cially re­spon­si­ble in­vest­ing

The Star Malaysia - StarBiz - - Viewpoint - By MARK GIL­BERT

BOTH com­pa­nies and the fund man­agers that in­vest in them are un­der pres­sure to pay more at­ten­tion to en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) is­sues.

For the for­mer group, that re­quires de­liv­er­ing in­creased trans­parency on an ever-ex­pand­ing range of met­rics. For the in­vest­ment crowd, tai­lor­ing strate­gies to ad­dress the new de­mands means in­creased spend­ing on data at a time when fees are slowly but steadily be­ing eroded.

A study pub­lished this week by cap­i­tal mar­kets con­sul­tants Opi­mas pre­dicts that the cost of buy­ing ESG data will rise to about US$750mil next year, an in­crease of al­most 50% from last year and up by al­most 300% since 2014.

The surge in spend­ing re­flects an ex­plo­sion in in­vest­ment prod­ucts that are mar­keted as be­ing more so­cially re­spon­si­ble in their ob­jec­tives.

The num­ber of in­vest­ment man­agers sign­ing up to the United Na­tions Prin­ci­ples for Re­spon­si­ble In­vest­ment in­creased by 18% last year to 1,111. In July, the sovereign wealth funds of Kuwait, New Zealand, Nor­way, Qatar, Saudi Ara­bia and United Arab Emi­rates met in Paris and agreed an aligned strat­egy to press the com­pa­nies they in­vest in to pub­lish as­sess­ments of cli­mate change risk and car­bon re­duc­tion strate­gies.

The growth in in­vest­ment prod­ucts with ESG man­dates is fu­elling a cor­re­spond­ing rise in in­dexes de­signed to track such strate­gies.

There are more than 3.7 mil­lion in­dexes world­wide, ac­cord­ing to a Novem­ber study pub­lished by the In­dex In­dus­try As­so­ci­a­tion. ESG in­dexes were the fastest grow­ing part of the mar­ket, with the num­ber of them climb­ing by 60% in the year to mid-2018, the IIA said. And it’s not just the world of eq­ui­ties that’s shift­ing.

In fixed in­come, is­suance of so-called Green Bonds that prom­ise to spend their pro­ceeds on en­vi­ron­men­tally friendly projects reached US$136bil last year.

Opi­mas reck­ons more than US$30 tril­lion of as­sets glob­ally are now as­signed to ESG strate­gies.

That to­tal has grown by more than 30% in the past two years and is set to in­crease by a fur­ther 17% in the next two years.

So the de­mand for data on how com­pa­nies are con­duct­ing them­selves is grow­ing. The data providers look­ing to fill that in­for­ma­tion gap in­clude Sus­tain­a­lyt­ics, Tru­value Labs, Arabesque and EthiFi­nance.

Tech­nol­ogy can help im­prove the breadth and depth of ESG in­tel­li­gence. Data based on sur­veys filled out by com­pany em­ploy­ees is dis­pro­por­tion­ately de­rived from big­ger firms with more re­sources to do the pa­per­work. By au­tomat­ing the col­lec­tion process, the firms har­vest­ing the met­rics can widen their nets and cut the cost of ac­quir­ing the met­rics.

And that’ll get eas­ier as gov­ern­ments oblige com­pa­nies to im­prove their re­port­ing stan­dards. But as the in­vest­ment strate­gies be­come more so­phis­ti­cated, so will the de­mand for deeper and more stan­dard­ized data.

Funds that seek to qual­ify as ESG com­pli­ant by ex­clu­sion – by screen­ing to bar pre-iden­ti­fied com­pa­nies and in­dus­tries such as those in­volved in min­ing or arms pro­duc­tion – are pretty sim­ple to de­sign. Shift­ing to a more pos­i­tive stance that puts more money into com­pa­nies that score more highly based on ESG cri­te­ria like car­bon out­put or gen­der di­ver­sity will re­quire more re­fined num­bers.

There’s also the is­sue of ma­te­ri­al­ity. En­vi­ron­men­tal con­cerns are more press­ing for a trans­port com­pany than for a bank, for ex­am­ple.

Car­bon emis­sions mat­ter more for a util­ity than a me­dia com­pany. And ve­g­an­ism’s grow­ing pop­u­lar­ity as a way to off­set global warm­ing af­fects food pro­duc­ers and restau­rant chains more than the gam­ing in­dus­try or tech­nol­ogy com­pa­nies. So a one-size-fit­sall ap­proach to the ev­i­dence won’t work. It re­mains to be seen who will bear the bur­den of the in­creased costs as­so­ci­ated with har­vest­ing the ob­ser­va­tions needed to power ESG in­vest­ing.

Fund man­agers may find cus­tomer en­thu­si­asm for sav­ing the planet di­min­ishes in the face of higher fees and lower re­turns.

But the growth of re­spon­si­ble in­vest­ing is likely to con­tinue un­abated, even if the as­so­ci­ated ex­penses are also headed in just one di­rec­tion. As the say­ing goes, if you think knowl­edge is ex­pen­sive, try ig­no­rance. — Bloomberg

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