ESG research and analysis
A majority of investors say they use each of issuers’ sustainability and general reporting, in-house capabilities, rating-agency research and certification or verification agents to inform their environmental, social and governance (ESG) analysis.
PEARSON We rely on external research on financial and nonfinancial data. We use research to inform the first wave of screening, which may include various thresholds to help us filter down our universe. Compared with the fundamental research that is available in, say, the equity market, fixed-income ESG research information available is lacking.
There is consolidation in the market and a race for data with improved quality and accuracy. The frequency of the reports and coverage from ESG research providers is still wanting but the range of available information is improving year on year. I expect this to continue as investors are demanding it.
Some of the drive is coming from the issuers themselves. Listed entities such as QBE have a commitment to being transparent and to providing data to enable investors to make informed investment decisions.
YUAN Every company and sector is different and the credit analysis function is vital given different clients will have different judgements on ESG themes. From my perspective, companies’ own sustainability research tends to be the best and most detailed.
Other sources are a bit hit and miss, largely because companies don’t engage with them all. At rating agencies it will be analyst dependent. The onus is on the investor to collate information from many different sources to form the picture.
BISHAY Both. Third-party certification is incredibly important but if an issuer just links to the UN Sustainable Development Goals it is unlikely to meet all our requirements.
For instance, in a recent semi-government bond transaction a very small part of the proceeds is funding upgrades to schools. We are interested in the underprivileged receiving an upgrade and not the average school. From our perspective, the discussion prior to projects being ringfenced is very important.
NUNEZ The certificate is great but our focus is on assessing management. We are very interested in understanding what a firm represents in its actions, its future business ambitions, what the individuals within the company are looking to do and how it will report ESG. A certificate on its own may not fulfil this need.
SWAN Anything that can get our dedicated responsible investment team exposure to management is helpful for us. Hearing it direct, rather than at the end of a chain of whispers, gets a tick straight away.
WARD It is great to have an independent party’s view to inform direct dialogue. It is straightforward for our analysts to see how a credit rating is reached with traditional balance-sheet analysis from rating agencies. On the other hand, one of the drawbacks with some of the specialist ESG ratings research is that the same conclusions can’t easily be drawn – some analysis leads to a triple-A rating while another agency might assign a triple-C for the same entity.
It is important that we start to have guidelines, such as Task Force for Climate-related Financial Disclosures style of reporting, so we can begin to compare companies on a like-for-like basis.
As others have said, talking to the companies directly is important. It is also useful for them to understand how investors are using their sustainability and impact reports – that these are viewed as more than a marketing piece.
PEARSON We value third-party certification but we like to have conversations with management wherever possible.
YUAN Access to management is most valued.