The gap on ESG data was a well-known issue that was addressed by Takeshi Kimura, special advisor to the board at Nippon Life Insurance, on stage at AsianInvestor’s Asian Investment Summit in Hong Kong recently.
He pointed out that asset owners need to get even better and more comprehensive data on environmental, social and governance (ESG) factors to improve monitoring of investment outcomes, also making the point that asset owners might have to lead the effort themselves.
“Data gaps, including outcomes measurement, stand in our way. There is an urgent need to develop data, not only in the environment areas such as greenhouse gas emissions, but also in the social areas such as human rights,” Kimura told delegates.
He made the point that addressing systemic investment risks related to ESG factors, such as climate change, is not something that can be managed by a single asset owner alone. Asset owners have established cooperation platforms to move the needle on standardising ESG data definitions and gathering.
Among these platforms are the United Nations (UN)-anchored Net Zero Asset Owner Alliance, Climate Action 100+ and Advance focusing on human rights and social issues. Nippon Life participates in these collaborative initiatives, as “it is more important than ever for investors to work together towards a common goal,” said Kimura, who is also the insurer’s representative on the board of directors at the UN Principles for Responsible Investment (PRI).
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The issue has indeed been discussed in detail as ESG factors have risen to the forefront of asset management, and particularly by asset owners who are making ESG factors increasingly a cornerstone of their investment strategy.
One of several asset owners to point to gaps in ESG information provided by major providers is Huh Jang, chief investment officer at South Korea’s Public Officials Benefit Association (POBA).
POBA gathers information on ESG implementation from third-party consulting firms such as Mercer and Preqin. In April, Jang told AsianInvestor he still wants better and more standardised data on how, and how much, the pension fund can gain from a greater emphasis on ESG.
“[Third parties] provide outside expertise on ESG-related information, but I still question the comprehensiveness and accuracy of available ESG-related data in general,” Huh said.
In November 2022, at AsianInvestor’s 12th Southeast Asia Institutional Investment Forum in Singapore, two senior executives from the Khazanah Nasional Berhad and Ontario Municipal Employees Retirement System (OMERS) Asia said that ESG ratings need common standards, as different data provided by various agencies are raising challenges in measuring the performance of investor portfolios from an ESG perspective, especially on the social and governance components.
“We use a lot of third-party providers [in the measurement of S and G], and one of the challenges we find is that when you look at X versus Y, the outputs are very different,” Anand Ramachandran, Singapore-based managing director with OMERS Asia, said on stage.
Instead of waiting for the world to change, institutional investors are doing it for themselves. Some are stepping up efforts to collect their own ESG information rather than relying exclusively on third-party data providers, as reputational risks of collecting inaccurate information increase.
“It is reputational for us: we don’t want to leave it to a third party to do it, we want to do it ourselves. That way we can ensure what we do is genuine, transparent, and something we can report on,” said Hans Op’t Veld, principal director for responsible investments at PGGM Investments, the investment manager for the €228 billion ($248 billion) Dutch pension fund, told AsianInvestor in February.
ESG data providers and rating agencies have defended the metrics they provide. An MSCI spokesperson in May made the point that different investors had different requirements.
“At this still-early stage in the development of ways to measure ESG risks, opportunities, contributions and negative impacts, many investors value having a diversity of views and approaches to inform their own perspectives and appreciate the need for ongoing development and innovation. This is especially true in areas where regulation is not prescriptive,” the spokesperson told AsianInvestor.
Meanwhile, asset owners themselves are pushing the boundaries of ESG data collection with new technologies. Asset owners are increasingly using artificial intelligence (AI) to collect or infer ESG information across public and private markets, even as they acknowledge the limitations of these new technologies and the importance of human mediation.
AI has played a central role in the development of the ESG taxonomy employed by Sustainable Development Investment Asset Owner Platform (SDI AOP), an initiative founded by AustralianSuper, PGGM, APG and Canada’s British Columbia Investment Management Corporation (BCI) in 2020, whose asset owner members collectively account for $1.5 trillion AUM.
“The AI scans records of 20 million patents that are updated every week, a task that would be impossible for a human team,” James Leaton, head of research at SDI AOP, told AsianInvestor in January.
Asset owner demand for universal solutions has also been heard by the asset management industry. For instance, in an effort led by the largest US pension fund, California Public Employees' Retirement System (CalPERS) and global investment firm Carlyle, investors overseeing more than $4 trillion in assets have joined forces to standardise data on environmental, social and governance (ESG) performance of portfolio companies.
Canada Pension Plan Investment Board (CPP Investments) is also a part of the project. Richard Manley, head of sustainable investing, told AsianInvestor that the ESG Data Convergence Project is an important milestone for the investment industry, 'but this is just the beginning not the end of the journey', he said in October 2021.