News & Insights

Data-driven, human-led: striking the balance in ESG transformation

Hard evidence of tough transformation is a requirement that is likely ringing in the ears of business leaders and asset managers this week.

There have been many news stories and opinion pieces fizzing around about the burden of proof that ESG-led strategy is paying back resting with boards, and large investors now demanding that such change is demonstrable.

Firstly, news came from the UK’s Financial Conduct Authority (FCA) that it believes ESG ratings need greater scrutiny to avoid functional risks to financial markets. In others words, asset managers need to be able to trust the data that they’re served up for guiding their decisions on (as Reuters put it) “climate-friendly investments”. Of course, the environment will likely be uppermost in their concerns, but the point is that the way in which performance against ESG factors is rated is likely to come much more under the microscope.

Looking at institutional shareholders that own large chunks of the biggest businesses, pressure came from a coalition that is seeking greater disclosure on the environmental risks those companies are grappling with, as reported by the Financial Times. Net-zero timelines are the main concern surrounding the 1,320 companies they have in the sights, it said. Again then, huge pressure played out in public over carbon output transformation that will ultimately rely on data accuracy, as will the way reputation for driving that change is managed.

On the other side of the coin, this piece in IR Magazine highlighted the stark reality facing businesses as they – as we say often these days – navigate that change. Greater disclosure around ESG-related risk and performance gives more ammunition to activists with an interest in accelerating the process, it said. Again, it’s about the data, and increasingly media will want more facts to prove that companies are making planned progress towards achieving ESG goals.

And perhaps the most telling data scraping going on in the media at the moment is The Economist’stracking of a self-designated portfolio of ‘green companies’ to chart their valuations. In its recent piece on “dissecting the green investment boom”, it concluded:  “Still, many investors are optimistic. Few think that the energy transition will go into reverse. They argue that the prospects for the sector as a whole are promising, even if some firms end up being duds. Comparisons to the tech industry at the turn of the century abound. Like the internet, decarbonisation will lead to structural change in the global economy. Capital will have to flow towards cleaner technologies. The process will create winners and losers.”Fair play. Again though, those investing in it, advising on it, writing about it and planning transformation against a long-term strategy will all need meaningful, accurate data. Guesswork and narrow views of the full extent of the action needed won’t cut it. 

 

Yet it’s not all on data’s shoulders. Last week’s story about the departure of Aviva Investors’ “star fund manager” made the point that ESG investing can’t all be about facts and data. Fund management is becoming depersonalised and institutionalised, it claimed, gently making the case for that not to happen.

The FT closed eloquently on the matter: “ESG investing can’t all be about marketing, screening, standards and data (not least because the latter isn’t currently very good). At some point, it has to be about standing up and shouting when something stinks. Without that, it risks making less of a difference — and being considerably less interesting to boot.”

Human understanding and human reaction will always be central to change driven by the ESG agenda. But communicators do need to be data-led in their strategic planning and evidence-based in the results they deliver – if they don’t, they can’t truly claim that with everything that’s going on in the world, their work has truly made a difference.

That’s what entries in the inaugural ESG Awards will be scrutinised around, and as a judge what I’ll be looking for above all else.

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