Fund managers integrating ESG factors in their strategies often cite the lack of quality data. A number of them believe that there are various limitations in using third-party data, while some listed companies have been criticised for presenting boilerplate ESG statements.
However, fund managers, being large shareholders, should also take the responsibility for educating companies about quality ESG reporting, according to Benjamin Colton, Tokyo-based head of asset stewardship for Asia-Pacific at State Street Global Advisors.
“The key is setting expectations. For example, we think it is our responsibility to go out and define what is affected by climate-related disclosures,” he told FSA during a recent visit in Hong Kong.
Colton noted that not all companies globally, such as those in Asia, are used to disclosing ESG information to investors. Some companies also do not have huge sustainability teams, which means working closely with them on ESG disclosure, he added.
He believes that the Sustainability Accounting Standards’ (SASB) materiality map should be a good start when educating companies on ESG reporting. The SASB framework, which is publicly available, only takes into account “financially material” ESG metrics, which varies depending on which industry a company belongs to.
“Environmental and social issues, for example, are often sector-specific. So what may be material to one sector may not be material to other sectors,” he said, adding that the SASB framework takes into account feedback from different stakeholders, including fund managers and other investors.
SSGA makes use of the SASB materiality map for its proprietary ESG scoring system, which was launched earlier this year. The aim of the tool is to refine the plethora of often conflicting ESG data to provide more accurate assessments and improve company engagement.
Focusing on just financially material information should also reduce the potential for “disclosure fatigue”, which is helpful for small and mid-cap companies that have limited resources and small sustainability teams, according to SSGA’s letter to the Hong Kong Exchange in response to a consultation that proposes mandatory ESG disclosure requirements for listed companies.
Fund management firms should also disclose what drives a company’s ESG score, he added.
“If you don’t have transparency on what is driving your scores or how it is created, then the companies would have no idea of what the expectations are.”
Tactical vs strategic targets
Colton believes that companies should eventually go beyond the SASB framework and think longer-term.
“The framework is the kind of bare minimum that companies should disclose. We think that they should have a strategic lens on what are the risks and opportunities affecting their businesses whenever they disclose information.”
As an example, only a few companies in the utilities and oil & gas sectors globally provide long-term greenhouse gas emission targets, he said. About 55% have two-to-three year targets.
“A longer-term target helps companies incorporate a scenario analysis on how these targets should impact capital allocation decisions, [which is more insightful for investors].”
On the other hand, the IT sector has become more longer-term with their ESG disclosures.
“Most of the IT companies are looking at it from a strategic lens, and that is perhaps because of the disruptive and forward-looking nature of the industry.”
He said the sector generally has reported on material ESG factors and has incorporated ESG risks that may affect their business, such as how much energy they have been consuming and if the markets they operate in have carbon pricing or taxes.
