Investments focused on environmental, social and governance (ESG) factors might provide larger companies with unfair advantages over smaller companies, argues IQ-EQ’s head of investor relations, Hugh Stacey.
Speaking exclusively to Fundeye, Mr Stacey explained that as there was no standardised system for measuring ESG within funds, investment management firms with more resources could assess their own products more extensively, while also being in a position to mark their own homework by picking one of the multiple scoring systems that would provide their strategies with deceptively positive grades on key issues such as governance.
This would all larger companies to present their products in a more favourable light, while also harnessing the popular sustainability trend that has become increasingly dominant since the outbreak of Covid-19.
Consequently, he felt there was a danger that smaller companies that were looking to improve their sustainability could be adversely affected by an investment climate where products could be assessed effectively in-house, alongside timeframes and criteria that favoured bigger firms.
Commenting the predicament smaller companies were facing, Mr Stacey said: “You may be doing things right but if you haven't laid out the procedures or haven't been able to report those things in a correct manner in a certain timeframe, that could have an impact on any sort of scoring metrics that people put in place.”
Not only was there an issue of smaller companies being penalised unfairly, but also with prospective investors assessing companies and holdings inaccurately in a way that could result in them missing out on great sustainable opportunities. In his view this was likely to have significant ramifications when it came to assessing the performance of sustainable funds.
He outlined this argument by pointing to the limitations of scoring systems.
Mr Stacey said: “So, there's the size and scale of companies, which is an issue, then there's the region, and then there is where they are in the development of a company. You may have a VC fund manager reporting with the same metrics as an LP, or an LBO fund manager. It’s very hard, and this is what worries me is, is people are not comparing like for like. It’s like apple versus pear or pear versus apple. So, I do worry about that when it comes to these more formal scoring mechanisms, then it goes back to the collation of data, and that's been a real struggle.”
Mr Stacey believed this was creating confusion for investors, as it meant that not only was the information released by many companies reliant on ambiguous criteria, but that ESG was not necessarily being used in guidance to a specific theme or sustainability idea. Instead, it was reactively applied as a stamp of approval on multiple strategies, making it a box-ticking exercise. The investor relations specialist went as far to describe ESG as a “buzzword for various different political pressures”.
Explaining his criticisms of the current ESG process, he said: “What you're finding is fund managers are reporting very bespoke and customised reports on a whole array of different limited partnerships (LPs). Depending on that LP they'll want certain information, and what you're finding is very disjointed and there's no real guidance or central theme.”
Nevertheless, Mr Stacey did not believe that any all-encompassing standardisation and central framework was practically possible at any point in the near future. Describing the multiple obstacles, he pointed to the numerous organisations with separate sustainability requirements such as IFRS, TCFD, ILPA and WEF, alongside association of voters such as Invest Europe with their own conceptions of ESG.
Commenting on the lack of a dominant system emerging, he added: “This puts a massive onus on financial groups and it goes back to scalability issues within that group. So, it would be great to have some type of standardisation but in practical terms, it probably would be difficult, depending on the sub asset class, and making allowances for additions and updates for the different asset classes.”
Alongside his scepticism toward ESG standardisation actually materialising in the near future, Mr Stacey was also unconvinced that a singular definition or set of criteria was a positive idea. Despite the issues with vague definitions characterising ESG investing, he felt that it was perfectly possible for funds to have different aspirations within sustainable frameworks. Some funds could feasibly be looking to revolutionise the global energy industry, while others simply sort to gain returns from socially responsible companies.
Instead, he believed that that reporting requirements and transparency were the crucial factors.
He concluded: “Having some type of reporting requirements is going to get people in line. At the moment, people are sitting on their hands, they don’t know what they're supposed to be doing, and so they they're just not doing anything. They're waiting out.”
IQ-EQ is an investor services group that provides of compliance, administration, asset and advisory services to investment funds, global companies, family offices and private clients globally. Currently, it operates across 23 jurisdictions globally and has assets under administration (AUA) exceeding $450 billion.
