Investor ESG Trends and Insights
Now that PRI’s 2023 investor ESG (sustainability) reports are public, I’d like to summarize a few insights I’ve learned based on 5 years of researching investor ESG data – 8 min read
Three main takeaways:
1) Trends data doesn’t (really) exist and this makes it harder to understand investors
2) ESG learners exist, but it’s difficult to find them
3) There is a difference between ESG leaders and ESG super leaders – good to know the difference
[Note – the reflections below provide a bird’s eye view level understanding of investor ESG data based on long-term patterns. Other useful data exists as well, e.g. direct data requests via due diligence questionnaires. I also consider these important, though the value, ability to transform them into meaningful metrics, and availability of this data are very different. The learnings below are based on long-term proxy-based insights, which require various levels of aggregation and analysis. In addition, most of the insights are based on analyzing PRI signatory data or data that partially connects with it, meaning a lot of the insights are based on the data we have access to and therefore may not represent the financial system as a whole]
1) Trends data does not exist: Well, at least not the way many people think of trends data. In short, investor ESG data over-time is very difficult to aggregate and transform into meaningful metrics that have universal year-on-year appeal and meaning. This is why investors are being continuously asked new, challenging, and relevant questions, but because the questions change so often and because investors themselves disclose new information all the time, synthesizing all this information is very challenging. What this means is that we often lose sight of the changes happening in the market.
– As an example, we saw for years that the number of investor engagements kept increasing growing year-on-year by what felt like substantial amounts, suggesting investors were becoming more active in this specific sustainability space. It was really comforting to see such development, especially when at times some were still questioning whether investors actually incorporated these practices in their operations. However, once the market practice matured, the expectations went from quantity to quality. Numbers were no longer asked and instead processes were the focus (i.e. how do you conduct stewardship). The overall development suggested improvements were taking place in the market, but from a data perspective, it became harder to showcase or prove.
What this all means is that it’ll remain valuable to maintain our rightful focus on year-on-year benchmarking and snapshots to drive change, but it’d help if we’d find more ways to enable needed perspective along the way. This will aid in enabling transparency and addressing the challenges raised below.
2) Learners exist: We’ve spent years merging and transforming investor data. Why? The aim was to understand how many leading investors there were year-on-year, what practices categorized them as leaders, and to also understand, where were the learners? Leaders are actually not too hard to spot, if you have the right data (still requires a bit too much work though), but learners were always difficult to isolate from the ocean of information. Our research combining PRI and Morningstar data suggested that the market was facing the same challenge https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4110596. In public discourse, we often label institutions as either “good” or “bad”, but what’s important to recognize is that what’s mixed with the “bad”, often includes a population of learners as well, some of whom dedicate genuine strategic focus, attention, and resources to becoming responsible investors long-term, which can take years. To get some sense of the numbers, by crunching the data via different approaches, I use the rule that approx. one-quarter of investors are leaders (they stay on top of the latest practices in the market year-on-year), one-quarter of investors are laggards (they barely change responsible behavior at all) and one-quarter of investors are learners (they take significant steps year-on-year, but because they haven’t made it to the top yet, they remain associated as a laggard). The last quarter is a mix. They include organizations that don’t fall clearly into any of the earlier categories. Why does this matter? To get learners to the top, it’d be helpful to identify and support them, but because objective, publicly available, and standardized trends data doesn’t really exist, it’s one of the reasons why we face a sub-optimal market equilibrium right now. In the future, it will be helpful for us to complement current data approaches with appropriate growth metrics so that capital allocators can choose to match with capital managers that are trying to grow their capabilities.
3) Real leaders exist: There are a lot of genuine leaders in ESG, but there are a lot of categories to be the best at. Categories can be based on investor type (e.g. being the best asset owner or the best investment manager), jurisdiction (e.g. EU vs. US), or best in a certain practice or issue (e.g. being the best-fixed income fund or best at climate). All in all, what matters is that as long as firms are owned overall on average by leading investors, firms will be more likely to change their behavior. However, we don’t have this collective understanding yet. Ideally, I’d like to have the information on all the investors of companies and to have solid ESG proxies for all of them. However, it will take us a bit longer to create such knowledge and data so that at the firm level, we have a better-aggregated view of the ownership base that includes all ESG-aware capital provided to the firm, including, private equity, fixed income, listed equity, banks and more. In short, we have a lot of leaders in the market, some of which we can see in the data, but we can’t yet examine the effect of leaders overall, at least not yet. Having said that, there still remains an opportunity to maintain our focus on the large and influential players, i.e. the few that have substantial resources, dedication, and commitment. There are a few in the market, which we also discuss in an academic paper- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3988058. They do deserve to be recognized in the market for their leading dedication and the associated changes we see in corporate behavior. They are unique and there are only a few of them. With the other leaders, we’ll have to wait a bit longer till we can showcase their positive influence in the market to the same level of credibility.
Mikael Homanen 