It feels like we as a society have been discussing the topic of sustainability for a long time. Rohith comments that while we have come a long way, the industry is actually still in its infancy. In this episode, we learn more about the challenges that institutions face when navigating ESG integration and how to move forward from here.
Rohith first explains the new regulations in place to promote sustainability. PRI is a series of regulations that asset managers and other stakeholders have signed to abide by certain regulations around sustainable investment. While the PRI is easy to sign, it is difficult to follow. The data surrounding sustainability is patchy at best and irregular across data service providers. The data is also prone to greenwashing, making ESG integration challenging for institutions across all sectors. How do I understand these sustainable goals? How do I quantify my portfolio? How do I assess the sustainability impact of the funds that I’m investing in? These questions are prevalent in the investment scene due to the aforementioned issues with data.
Another challenge is attempting to navigate the numerous sustainable goals in place and having to weigh the value of these goals. Let us look at an example of wanting to invest in a company that produces meatless burgers. This company meets the goal of reducing greenhouse gas emissions but does not meet another goal concerned with the health of people as these meatless burgers have higher levels of sodium. The example here portrays the challenge that investment managers face when navigating the different SDG goals, slowing the integration of ESG in the industry.
Rohith shares that investment managers currently do the bare minimum of positive and negative screening. Positive screening is more towards targeted investments, highlighting companies that have high ESG scores and have historically gravitated towards sustainability principles. On the other hand, when conducting negative screening, managers will have a list of keywords that serve as a red flag. If any funds of products have exposure to these keywords, the managers will exclude them from the portfolio. While this is a good first step, one’s duties as a PRI signatory are much more. Rather than simple positive and negative screening, asset managers should take on active ownership principles towards companies in their investment portfolios. The problem with negative screening is that if we simply leave these companies be and exclude them, they will continue to engage in practices that degrade the environment. With active ownership providing an influx of capital and direction to these companies, asset managers can bring about a more substantial and long-lasting change to our world.
As the whole process of ESG integration is arduous, Rohith believes that having the following 3 qualities will help the industry move forward. The first is an understanding of sustainability. Secondly, it is crucial to understand investments and asset allocation. Finally, technology such as machine learning is required to solve the data related challenges in the ESG space. If these 3 qualities start to work in tandem, the industry will leapfrog and progress far beyond what is currently being done. Sustainability Insights is a product that pushes for this, helping asset managers track if their investments are following the guidelines set by the UN and other regulators around the region.