Standardising the definition of environmental, social and governance (ESG) investing could enhance the effectiveness of sustainable strategies, according to Morningstar’s director of policy research, Andy Pettit.
Speaking at the financial services firm’s ‘state of the nation’ briefing, which outlined Morningstar’s outlook for the future of asset management in the new decade, Mr Pettit told Fundeye that classification was a crucial issue for companies and regulatory bodies aiming to encourage credible sustainable action plans.
He explained: “I think taxonomy is the lynchpin of the whole European sustainable finance action plan, in as much as identifying what is truly a sustainable activity. That plan is so wide-ranging, you certainly can’t accuse regulators of not doing enough.”
Citing the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA) as examples, Mr Pettit noted that regulators were assessing every aspect of the financial industry typically associated with ESG, including green bonds, credit ratings, research and data services. However, he argued that a developed approach for sustainable investing across the financial industry required greater clarity over definitions.
He said: “There are so many different frameworks being talked about. It would be great if they would start to coalesce and focus on a few to embed as true standards.”
Mr Petit highlighted the importance of data disclosures, and how they could be enhanced through greater clarity, by standardising the definition of ESG.
He argued: “For a data company, disclosures are great, if they come with the caveat they are standardised and somewhat comparable. The commission I think is becoming more aware it’s not going to work if you leave it to be freeform. Later this year, they will look more closely at how they are going to standardise some of those disclosures. This goes right across the value chain: it starts with the corporates, which is essential information for fund managers aiming to embed sustainability into their investment processes, and that goes through to advisers who would have to understand their clients and ESG preferences and match them to suitable products.”
The rise and rise of ESG investing
The policy director’s emphasis on ESG issues reflected the increased focus on the subject matter during both Morningstar’s presentation and across the investment landscape.
Speaking alongside Hortense Bioy, director of passive funds and sustainability, and Jonathan Miller, director of manager research, Morningstar perceived the ‘rise of ESG’ as a key trend in 2019 alongside other leading stories in the asset management world such as the growth of passive investing.
Ms Bioy noted that, last year, 35 percent of fiscal flows into funds recorded by Morningstar went into sustainable strategies. Meanwhile, Mr Miller observed that “ESG is in every presentation you see now.”
As director of passive funds and sustainability, Ms Bioy also felt that ESG could deepen the pool of prospective investors, and provide a bridge between the financial industry and under-represented groups in the investment space such as women and millennials. In her view, it was important that ESG was not simply about screenings and exclusions but about reforming the entire approach asset managers take to investments in order to improve society and resolve key global issues such as climate change.
Commenting on the embrace of ESG issues by leading asset managers, she said: “They are reframing the conversation, and using ESG and increasingly SDGs to articulate their investment process. This is not necessarily a bad thing. It is just another way of thinking about investing, and this could resonate with retail investors. A lot of investors have been left on the side because they are not interested in investing when you talk about return and risk. If you start talking about ESG, you can make them feel better about themselves and their investments. This is one of the reasons Morningstar got into that space in 2016.”
She added: “A lot of investors are not investing for the future, because there is a lack of connection with investments. With ESG, advisers can ask different questions that resonate with investors. ESG is a way of deepening and widening the pool of investors, including with women and millennials. “
Ms Bioy believed that concerns over greenwashing were understandable, but felt that as data became more sophisticated and extensive, it would be hard for fund managers and investment management firms to dubiously label their strategies and products as ESG-compliant.
“We are on a journey, and with regulation and more scrutiny, as more data comes in, I think we will mitigate greenwashing,” she concluded.
