Outsourcing ESG methodology no longer enough

23 January 2020
| By Jassmyn |
image
image
expand image

Asset managers will need to take greater ownership of environmental, social, and governance (ESG) exclusionary processes, as oversight of ESG investing tightens, according to State Street Global Advisors (SSGA).

SSGA’s latest ESG report said that while exclusions had become more widely used, many institutions had come to rely on third party ESG data providers for screens of topics they wished to exclude.

However, investors were beginning to question the data and methodology powering the exclusionary lists.

“The increased scrutiny of all ESG investment products by both regulators and activists, in 2020, we expect it to become increasingly untenable for investors to fully outsource their exclusionary screening methodologies and keep their involvement at arm’s length,” SSGA said.

It noted that the choice of a data provider’s methodology and which companies were included in their overall universe could have direct and differentiated impacts on a portfolio.

The report also said ESG strategies would become more complex as investors were beginning to set multiple ESG objectives within their portfolios.

“For example, fully eliminating exposure to certain sectors while minimizing exposure to underperforming companies and also setting broad emissions reduction targets across the portfolio,” it said.

This, it said, had implications for both portfolio construction and product development.

“The increased incorporation of ESG into index portfolio construction will further mainstream ESG investing within active strategies,” SSGA said.

“This along with the evolving understanding of fiduciary responsibility means that active managers who do not incorporate ESG into their company due diligence and investment processes will need to explain why they don’t see ESG as a portfolio risk or investment opportunity.

“Investable products, too, will respond to investors’ evolving ESG goals. We expect to see the methodologies of existing product suites being updated to reflect multiple ESG objectives, and a growth in new investable solutions to meet the variety of more complex demands emerging in the market.”

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest developments in Super Review! Anytime, Anywhere!

Grant Banner

From my perspective, 40- 50% of people are likely going to be deeply unhappy about how long they actually live. ...

11 months ago
Kevin Gorman

Super director remuneration ...

11 months 1 week ago
Anthony Asher

No doubt true, but most of it is still because over 45’s have been upgrading their houses with 30 year mortgages. Money ...

11 months 1 week ago

Jim Chalmers has defended changes to the Future Fund’s mandate, referring to himself as a “big supporter” of the sovereign wealth fund, amid fierce opposition from the Co...

1 day 8 hours ago

Demand from institutional investors was the main driver of growth in Australia’s responsible investment (RI) market in 2023, as the industry continued to gain momentum....

1 day 8 hours ago

In a new review of the country’s largest fund, a research house says it’s well placed to deliver attractive returns despite challenges....

1 day 9 hours ago