ESG investing grew by leaps and bounds in 2020. A recent survey completed by the CFA Institute found that 85% of CFA Institute members now take ESG factors into consideration in their investing and that client demand for organizations to consider ESG factors rose to 65% in 2020. The survey further shows that 76% of institutional investors and 69% of retail investors have interest in ESG investing. Finally, a staggering 90% of investment professionals expect their firm’s commitment to ESG research will increase going forward.
However, interestingly the survey found that only 19% and 10% of institutional and retail investors, respectively, currently invest in ESG products. This delta shows interest has not yet led to widespread adoption, so what is holding investors back?
Greenwashing & Reliable Data
While there are several issues ESG investing must overcome over the next few years, one statistic from the CFA Institute’s report may provide a clue: “78% of practitioners surveyed believe there is a need for improved standards around ESG products to mitigate greenwashing… greenwashing means conveying a false impression or providing misleading information or a misleading narrative about how a company and its products are environmentally sound or positive in an ESG context.”
The fundamental problem lies in a lack of consistent, reliable data. The CFA Institute’s report finds that, “ESG data are substantial and fast growing, but unwieldy.” Furthermore, it finds that “company reporting plays a key part in the sourcing of ESG data… and that the consistency and comparability of ESG data from companies is poor. There are very limited national requirements for companies to report on most ESG data, with companies left to determine for themselves which ESG factors are material to their business performance and what information to disclose to investors.”
Better data will need to come from a mix of clearly defined government reporting standards and consistent aggregation of company data by private industry. After performing considerable due diligence on several ESG data providers, we found material differences in the data from provider to provider and while we did ultimately choose one, we continue to consider other providers to augment our research.
The CFA Institute’s report also found that “valuation approaches lack consistency, and investment professionals report various ways of incorporating ESG into equity analysis.” These issues are emblematic of an industry in its infancy.
Over time the framework for ESG investing will evolve to provide investors with the tools they need to make sound investment decisions as it is clear demand will continue to increase. Additionally, investors will have to hold companies accountable on the various ESG factors and that accountability will need to be reflected in ESG data and the vehicles used for ESG investing.
For the complete report from the CFA Institute, please visit the CFA Institute’s website at https://www.cfainstitute.org/-/media/documents/survey/future-of-sustainability.ashx.