The pitfalls of ESG data and how to overcome them

As demand for Environmental, Social and Governance (ESG) investments skyrockets, one of the challenges faced by both professional investors and the public when making investment decisions is the inconsistent and often patchy data available. This can be confusing, makes it challenging to know what you’re getting and, at worst, helps greenwashing flourish.

In the first video from our Investment Insight series, Louie French, Lead Portfolio Manager of the Tilney Sustainable Portfolios has chosen to focus on this important subject by highlighting some of the key data issues and what can be done to overcome them from an investment perspective. He is joined in conversation by two guests: Chris Bowie, Partner and Portfolio Manager of the Sustainable Short-term Bond Fund at TwentyFour Asset Management and Jamie Jenkins, BMO’s Co-head of Global Equities and the lead fund manager of the BMO Responsible Global Equity Fund.

Key insights from the video

How do you use data when investing? And how do you avoid greenwashing?

Chris Bowie: the problem we have is that all of the ESG databases that you can buy externally all work from a listed equity perspective and we are credit investors. We have to reach out to companies ourselves.

Jamie Jenkins: the quality of data has immeasurably improved, particularly over the last five years… but increasingly our activities are taking us towards certain emerging markets opportunities and we see data quality degradation again… the data is improving but you can’t take it at face value.

How do you engage with companies?

Jamie Jenkins: engagement and active ownership have always been important to us… we are seeking to invest in companies for a very long-term horizon and establishing a deeper dialogue with companies has always been our approach.

Chris Bowie: we don’t have an equity team so we don’t get to vote on anything. The power that we have is through engagement. I’d say we’ve had successful engagements where we’ve managed to change company behaviours and we’ve had failures where we’ve ended up having to sell bonds.

What about regulation?

Addressing the dramatic increase in ESG-related regulations, our guests discuss the EU Sustainable Finance Disclosure Regulation (SFDR), which aims to make it easier to compare sustainable funds, drawing on experience of classifying their own funds.

What next for the industry and what are the opportunities?

Jamie Jenkins: I believe we’re going to see a much bigger shift towards impact – the sort of impact investing that delivers real world improvements because of that broader recognition that we’re not moving fast enough… Not just a return objective – actually trying to achieve societal and environmental change.

Chris Bowie: there is a massive weight of money, partly because of regulation, partly because of trends, that is going to continue driving investment into sustainable credit and government bonds and I think we will continue to see a fall in the cost of capital. The interesting challenge will be what happens for those sectors – the sin sectors – that are going to be negated here.

How Tilney can help you with sustainable and responsible investing

Our track record of successfully managing sustainable and ethical investment mandates for clients goes back more than 15 years and in 2021 we won Best ESG Investment Strategy at the City of London Wealth Management Awards. Find out more about our approach or book a free consultation speak to specialist about your investments.