- Data gaps are causing some investors to delay incorporating ESG or sustainability into their investment practices.
- Private markets have some of the largest data gaps but also contain some of the most impactful investment opportunities; residential real estate accounts for 16% of UK emissions and transport 24%.
- The introduction of reporting standards and mandatory reporting are aimed mainly at listed corporates rather than private markets.
There is a growing sense among sustainable investors that the wait for future comprehensive, comparable sustainability data is hindering effective investment in the present.
For some, data challenges have meant postponing any ESG or sustainable investing efforts entirely.
“I’ve come away from a conversation this morning about trying to get a trustee to move their default strategy for their defined contribution scheme to an ESG strategy,” Anastasia Guha, head of sustainable investment at consultancy Redington, said at the Future of Climate Finance event hosted by Capital Monitor and New Statesman Media Group on 8 June.
“And the conversation was challenging. Part of it was there isn’t enough data. [Before they added:] ‘And by the way, ESG ratings are not very good. So let’s just wait for another five years.’”
The anxiety expressed by Guha was echoed by Douglas Flint, chair of Abrdn and former chairman of HSBC, at the same event. “In my view it will be hugely disappointing if we spent the next five or ten years debating who’s got the best metrics,” he said.
“People are able to claim they’ve done more than their peers – by saying ‘look at the metrics that we measure’ – that they’re showing progress, without actually demonstrating that the change in the metric is actually reflected by changing emissions.”
Flint added: “We sometimes obsess about who’s got the best way of measuring something. But 80% of this stuff is pretty simple: we’re stopping deforestation or we’re stopping oil and gas where you can do renewables – get the big things right.”
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Impact without data
One area where sustainability data is notoriously sparse is in private markets, such as venture capital, private equity, infrastructure and real estate.
“While we want to decarbonise and reduce carbon emissions, [due to] the lack of data within private equity – especially given that two-thirds of our private equity is in funds – getting that data to then be able to demonstrate that you have carbonised is almost impossible,” said Amanda Young, Abrdn’s chief sustainability officer.
But according to Rob Martin, global head of strategy and research for real assets at Legal & General Investment Management, private markets, including infrastructure, real estate and energy generation, are where investors can find some of the lowest hanging fruit in terms of impact, regardless of how comprehensive the investible data is.
There are areas where the potential to reduce emissions is high. In the UK, for example, emissions produced by residential real estate, predominantly due to gas heating, accounts for 16% of the country's total emissions, according to the UK’s Department for Business, Energy and Industrial Strategy. Transport accounts for 24% and power generation 21%. Private markets therefore have significant potential to provide impact investment opportunities.
Martin said: “I do think there is this overlap between green infrastructure and venture capitalists that’s exciting. There’s a part of our business that’s just invested in Rovco. Their business is focused on offshore wind installations and oilfield decommissioning. There’s a whole ton of innovation that needs to happen, and much of that can be financed in private markets.”
ESG data: cutting off your nose...
Investors that are looking to have a positive ESG or sustainability impact, but which also want to base decisions on comprehensive sets of data, may be cutting themselves off from some of the most impactful opportunities. And this is likely to be remain the case going forward.
Many regulatory initiatives focused on reporting transparency are unlikely to improve the quality in private markets. Regulators have produced taxonomies, introduced mandatory reporting of the Taskforce for Climate-related Financial Disclosures (TCFD) for corporates and certain financial institutions, and work by the International Sustainability Standards Board (ISSB) is under way to produce a consistent set of global sustainability reporting standards.
Many companies also voluntarily report to the CDP (the non-profit formerly known as the Carbon Disclosure Project) and undertake their own Sustainability Accounting Standards Board and Global Reporting Initiative reporting.
This issue is that many of these standards will apply to listed companies only or will be adopted only by those firms with the resources available to keep up with a variety of voluntary reporting schemes.
A similar issue also applies to sustainable bonds. Issuers report a small number of metrics and KPIs, but also qualitative information that is specific to their sustainable projects. Sustainable bond reporting is not yet at the stage where it is easy to compare metrics across issuers.
Investors that insist on having comprehensive and comparable data before allocating capital to sustainable investments are likely to find they are cutting off some of most impactful opportunities.
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