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Investors do not lack ESG data, they lack the ‘right data’

Morningstar notes that disclosures are not consistent, and sometimes the information supplied is not material.

Investors do not lack ESG data, they lack the ‘right data’

Despite companies and asset managers proving a lot more information around ESG issues, investors still lack consistent ESG data, a new study from Morningstar has found.

Public companies, for instance, often choose indicators from a variety of standard-setting organisations.

‘But these reports may not contain information that is material given the firm’s business context, and do not help investors understand a company’s ESG risks,’ noted Morningstar.

It found that currently fewer than 30% of stock issuers around the globe disclose ESG factors in a consistent fashion.

In the private market, more than 50% of new capital that is being raised in the US is exempted from most disclosures. This, the study argues, is particularly problematic in the growing private equity space.

Confusion

A similar trend was identified in the fixed income market, making it difficult for investors interested in green bonds. It’s not always clear what is being rated in this space.

Sometimes a bond’s ESG rating is based on the ESG risk the issuer faces, and sometimes the ESG rating is based on what the proceeds of the bond will be used for, Morningstar pointed out.

In the mutual fund sector, the investment research firm found that asset managers inconsistently disclose ESG information about their holdings. This creates a potential disconnect between what managers say about their funds and the ratings done by third parties.

These independent firms analyse a fund’s holdings to present an impartial estimate of the degree to which a fund is sustainable or meets various ESG measures.

‘However, such an approach may not align with the definition the asset manager uses to define an ESG holding or how their strategy reflects an ESG approach,’ said Morningstar. ‘To some extent, this is a problem caused by inconsistent disclosures from issuers.’

Recommendations

Given this backdrop, Morningstar has made a few policy recommendations. It is urging regulators to coordinate with each other so that investors in different jurisdictions have access to comparable ESG metrics.

In addition, the firm is calling on regulators to embrace standard-setting organizations’ existing metrics and require issuers to disclose these metrics when they are material to a company’s business.

‘For funds, regulators should set a minimum standard so that investors know whether a fund considers ESG factors at all as part of its investment process and if a fund considers ESG criteria, sustainability assessments, or impact assessments as central to its investment approach,’ said Morningstar. 

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