ESG and the Investment Narrative

ESG continues to be an increasingly important to investors. What it emphasizes can mean a lot of different things to different people, but at its core it’s about investment that looks beyond the bottom line to put money to work on causes near and dear to an investor’s heart.

But finding good ESG data to meet increasingly sophisticated client needs is difficult – reporting standards vary from country to country and sometimes even from company to company, as a lack of any real standardized data from regulators continues to prove a pain point.

“The data quality needs to be 100% certain and needs to be accessible to have a real effect on the stock market,” said Stefania Di Bartolomeo, founder at Physis Investment, which specializes in sustainability data for investors, at a recent meeting of the Chicago Payments Forum. “If no one has access to great data, it won’t generate any kind of effect.”

It’s made doubly tricky by the fact that, put bluntly, companies just don’t like to report unflattering data unless it’s made a requirement. That means there’s still really no substitute for deeper investigation to find the narrative about a portfolio.

For firms like Physis, the answer has been in human analysis – but that’s a costly and time-consuming endeavor, particularly as information continues to change over time. The investment is something that sets Physis apart from the more surface-level scores most of the older-style ESG analysts offer, but it’s likely the next big move for the market; after all, not all clients are looking for the same data – more sophisticated clients are looking for fairly in-depth information.

“A sophisticated user, like a pension fund, is someone who knows about sustainability and knows what’s going on,” Bartolomeo said. “Then you might talk about a family office, and they may only be looking at one or two variables to build customized portfolios for their clients. They won’t be using the full range of information we can provide, but we can still offer them things so that clients who care about a particular data point can change their allocation based on that specific data point.”

This sort of data push has ramifications for all investing, not just ESG. It takes a shift in mindset to go beyond solely dollars-and-cents driven investing and into telling a story about where investor money is going. Knowing the full story of how a company decides to use investor money in its production and management processes offers a narrative for investors. For some, that narrative and the story it tells of a company’s broader decision making may be as or even more important than the investment’s yield on its own.

And that story is something a simple ESG score can’t provide.

— Jessica Purdy