ESG roundtable: How to quell greenwashing
A recently Fund Europe The roundtable discussed the need for transparency from rating providers and how education can help owners and managers make progress in curbing greenwashing.
Stefano MontobbioGlobal Head of Investment Governance and ESG, EFG International
Neill BlanksDirector of Research, MainStreet Partners
Scott FosterHead of Digital and Governance Products, Caceis
Muhammad MasudDirector – Sustainable Investing, BlackRock
Fund Europe asked four ESG experts from the industry to discuss five key points of the topic: ESG ratings, transparency, greenwashing, voting and the development of ESG in different regions.
Neill Blanks, Research Director at MainStreet Partners, started the roundtable discussion by addressing ESG ratings, an area where there are notoriously inconsistent rating scores between individual vendors – an aspect of the system that is unhelpful and can cause confusion.
MainStreet Partners and fund houses alike have internal processes for rating companies against ESG criteria, but duplication has created confusion and created discrepancies. There has been debate as to whether there should be greater consistency between different ESG ratings, or “the more the merrier”, provided investors genuinely understand these differences.
Blanks said: “There are a few aspects to this. Recently we have heard calls for ESG ratings to be regulated. Whether it’s regulation or more oversight, something is certainly on the horizon and I see it happening sooner rather than later.”
Blanks stressed that as with financial ratings, there are different perspectives on ESG, noting that he therefore finds it acceptable to have different providers with different methods for doing so.
“What matters is the quality of the data that feeds the process. The quality of the output is only as good as the quality of the input. There is definitely a data issue in terms of quality and everyone knows that.”
Blanks emphasized that different approaches are required for market competition. Muhammad Masood, Director of Sustainable Investing at BlackRock, agreed, adding that transparency is key.
“This is relatively new… but there is some convergence in certain areas. If we look at the definition of ‘E’ there is more alignment, for example recognizing that renewable energy, cleantech, water management and waste management can be relevant pillars within an environmental category for many companies. Then the question arises: How exactly do you fill these buckets? What are the KPIs [key performance indicators] that you use? how do you weigh her There are differences, but the themes are somewhat consistent.”
According to Masood, companies that increasingly report on ESG will help promote consistency.
“I’m afraid we’ll end up with reports where we have a lot of data on carbon emissions, energy use, etc., but the numbers won’t provide any insight…”
“Rating companies use both publicly available reported information and estimates. We’ve found that investors generally have more confidence in audited data reported by companies. If there are certain types of KPIs that companies are starting to report on consistently, that can also help with consistency.”
Masood went on to explain that investors need to be aware of the methodology going on behind the scenes and that transparency is therefore key.
“You have to be very clear about what you see. It’s also kind of an investor reconnaissance exercise … you have to understand what’s going on behind the scenes, open the lid and take a look underneath.”
However, Stefano Montobbio, Global Head of Investment Governance and ESG at EFG International, cautioned that the way data is interpreted and aggregated by different providers should not be over-regulated. “Otherwise I am afraid that we will end up with reports where we have a lot of data on CO2 emissions, energy consumption, etc., but the numbers will not provide any information because they provide information about dynamics, trends and actions that companies are taking to Take improvement, omit data and their footprint.”
He agreed with Masood’s stance on transparency. “I would share the view that transparency regarding methods should be shared, while acknowledging that these methods are often complex. Understanding the differences and the different aspects of weighting and the data points considered is not easy to perform as an analysis.
“As such, transparency is likely to bring clarity only to the super-experts and not to the general public. Training is another very important point, because without it, data and information become almost useless.”