Environmental, Social, and Governance (ESG) investing started as a voluntary “feel good-do good” movement just a few decades ago. Today, it is imperative in attracting capital and creating financial and competitive success. It has become the number one tool for investors looking for ways to generate positive investment outcomes and impact while managing financial risks and returns.
As good as it may sound, the reality is that the current ESG reporting landscape is “a little bit of the wild wild west” because of the lack of transparency and standardization. In 2019, the UN’s Principles for Responsible Investment (PRI) noted in their annual report that “the market is calling for greater coherence and consistency” for ESG investments to have a real-world environmental and social impact. The voluntary approach on what to disclose and report has failed to produce the level of consistent, comprehensive, and comparable information that investors need to accurately make decisions and support their portfolio’s companies in their sustainability journeys.
So, what can asset managers, pension funds, and other institutional investors do to take matters into their own hands and achieve a transparent ESG portfolio and make a true difference? In this blog, we have gathered 5 essential steps to scale up the ESG transparency and equip your portfolio companies in their own sustainability journey.
5 steps to deepen your ESG transparency
1. Standardization: determine what to disclose
First and foremost, it is time to move away from the wild west era of ESG reporting, and there is one easy solution for that – standardization. Luckily, there are several internationally accepted frameworks and standards any organization can reference to or use as a guide to establishing a complete environmental, social, and governance (ESG) reporting process, such as WEF, SDGs, GHG, SBTi, and PRI. Aligning your portfolio with well-established reporting frameworks will both help your organization internally as well as facilitate for important stakeholders to access, interpret and compare relevant data.
Get to know the most important ESG frameworks right now and what they aim to achieve HERE!
2. Materiality: target the right ESG issue
Having said that, it is equally as important to differentiate and identify the ESG materiality to the specific financial performance in consideration – because not all ESG issues matter equally. Adopting a one-size-fits-all approach to all industries may result in missing out on important data and eliminating your chances to make a true impact. Think of it this way, a manufacturing company usually emits more GHG than, let’s say, a software enterprise, while the software enterprise probably should look closer at its indirect, hidden GHG emissions downstream and upstream in its supply chain. The ability to measure relevant ESG performance is essential to improve the sustainability performance of your portfolio.
However, a common pitfall is focusing too narrowly on one specific scope, such as carbon footprint, and missing to take into account the overall ESG performance. Encompassing every social, environmental, and governmental action, intention and impact is a complex matter – but a must to be truly effective.
See Common Pitfalls in ESG and How to Avoid Them for further tips.
3. Demand data transparency
According to a new survey by Workiva, the majority of investors find it difficult to trust companies' qualitative reports and rather prefer ESG disclosures in form of numbers and measurable data. Demanding data transparency is the way forward for investors’ to ensure that the ESG information provided is accurate and not misleading in any sense. In addition, being able to categorize, compare and analyze your portfolio company’s data will help to make more informed decisions and put your focus where it really matters!
4. Risk management: conduct materiality analysis on current portfolio businesses to identify ESG risks
A bit too often, the demand on ESG compliance is strongly embedded during the pre-investment – but little is done on demanding ESG data on the already existing portfolio companies. Conducting material analysis on the current portfolio holdings is essential to better understand the risk and return profile and thus, gain transparency across your entire portfolio. On top of that, investment firms and asset managers operating in the EU are obligated to publicly disclose their ESG process according to the SFDR’s mandatory Principal Adverse Impact Statement and Periodic Reports.
Not sure if you’re affected by the SFDR? Check out our SFDR whitepaper to find out!
5. Follow-ups: conduct continuous reviews of your portfolio to assess progress towards ESG objectives
Lastly, building a transparent ESG portfolio takes time and effort, and while it may be tempting to think the work is done once you’ve established one – it is only the beginning. By setting the right KPIs, collecting up-to-date data based on suitable frameworks and materiality, you will equip your portfolio companies to operate more sustainably. After all, there is no other way to reach your ESG goals than assuring that all in your portfolio are onboard!
ESG management is easier when it’s automated
Achieving and maintaining a transparent ESG portfolio requires a lot of data and analyses, but with the right tool, the entire process will run like a well-oiled machine. Worldfavor’s platform automates the entire process for you – from gathering relevant data, aligning to standardized frameworks, and even automating the analyses for you. Get accurate and consistent insight on how well your portfolio companies manage their material ESG and thus – how well you are doing. Sounds interesting? We would love to tell you more!
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