Willem Keogh, Head of ESG and Thematic Index Solutions at Qontigo, recently sat down for an interview with Climate Action to discuss the outlook for environmental, social and governance (ESG) data and its integration in portfolios. Below is a transcript of the interview and of two further questions posed to him by Pulse Online.
How important is ESG data mining to integrate data successfully into institutional portfolios?
“It is very important. The quality and accuracy of ESG data will determine how successfully your sustainability objectives are incorporated into a portfolio and that no undesired or unforeseen effects – either from a risk or returns perspective – are created. It is crucial to separate the facts from the noise and the false signals.
It is important to stress the need to avoid falling into common pitfalls of data mining that may lead to spurious or erroneous conclusions. Things like false correlations, random combinations, samples and size biases are obstacles in the way of correct data analysis. Increasing ESG data will improve this analysis, but investors should make educated and conscious readings of the data during the investment process.
The growing availability of and possibilities around ESG data are improving data-mining capabilities when it comes to securities analysis and hence supporting ESG integration. With more regulators issuing new standards of sustainable investing and reporting, and a fast-growing number of financial institutions and companies complying with them, the task for portfolio managers to observe sustainable principles with skill and accuracy, and fully integrate ESG into portfolios, is becoming easier. For us index providers, this has opened up a historical opportunity to efficiently utilize those data streams in a systematic way.
At Qontigo we work with leading ESG and carbon data providers, including Sustainalytics, CDP and ISS Ethix. This guarantees we have rigorous and robust sources that underpin the strength of indices, and we’ll make these available wherever there is objective and reliable data.
You can now integrate the type of ESG data of your choice, be it backward-looking or forecast, qualitative or quantitative, as well as choose between either a risk-management focus or an impact one. I am aware that there is a long way ahead in terms of improving the consistency of data and its availability in smaller markets, but the direction we are traveling is very promising.”
How significant is the gap between the data investors need to align their portfolios with global climate goals and the data that’s actually available?
“The lack of ESG data has been a frustration for some time, but I take a more optimistic view on this point given the huge advances we’ve seen in data disclosure and collection in recent years. Data disclosure is steadily getting better, more reliable and more granular. And hence that gap between data requirements and availability is narrowing. Data from CDP and ISS Ethix, for example, allow investors to significantly lower the carbon footprint of portfolios, invest in companies doing the most to bring emissions down, and integrate science-based targets into fundamental analysis. You have the option to track via indices those companies taking action on, managing and understanding the effects of climate change. Within large- and mid-cap stocks and throughout developed markets, I’d say the information available is well suited to help the transition to a low-carbon economy. More work needs to be done on disclosure in other markets.
Investors have a range of providers and approaches to choose from that best fit their needs and goals, and they should look under the hood and understand what each data set reflects and prioritizes. No two data sets covering a same field will look exactly alike and, hence, it is important that the end user understands the nuances. In many cases it is good to have different views as these can be additive.
As our partners at CDP said this week, reforms to improve the transparency of climate-related data will help efforts to incorporate climate risks into financial frameworks and develop transition risk modelling, ultimately helping to align capital-allocation decisions with climate policies. ESG data is one of the best tools investors have at the moment to encourage companies to innovate and change. It leads to smarter decisions both from companies and from portfolio managers.”
How integral are events like this in driving the sustainable finance agenda?
“At every sustainable investing event I attend, ESG data features as one of the main topics of discussion. There is a rich, ongoing debate about the efficiency and materiality of this information, and how best to use it while investing. With more and more countries establishing sustainable investing regulations, the need for ESG information will only become more relevant. I don’t foresee that changing in the near future — ESG data will shape a debate at the core of the sustainable finance agenda.”