Ed. note: Today we review a recent report from Georgeson on the institutional investor perspective of using ESG information. Hannah Orowitz, Senior Managing Director at Georgeson and one of the report’s primary authors, kindly provided us this short summary of findings.
As the environmental, social and governance (ESG) ecosystem has evolved, so have investor expectations of ESG data for current and future investments. In Georgeson’s recent global research report – Understanding investors’ environmental, social and governance integration – we analyzed ESG policies and practices of more than 350 of the largest global institutional investors and found that in excess of 90% integrate ESG considerations into their investment and stewardship activities and more than 80% are UN PRI signatories.
Companies must adapt or develop ESG reporting aligned with investor-favored frameworks and standards to meet investment selection criteria and continuing stewardship expectations. Furthermore, proliferating use of third party ESG data requires careful attention to information and scores published by those data providers.
While the need for transparent and targeted ESG disclosure is clear, the overwhelming number of voluntary frameworks, data providers and products often obscures the path forward. Companies should review and understand data usage practices and disclosure expectations of specific investors. By doing so, companies can efficiently manage and disclose key ESG risks and opportunities accordingly.
Notably, based on the 2020 year-end information, we found that the largest institutional investors globally tend to focus on only 39 unique ESG data providers and five primary voluntary ESG disclosure systems. We discuss below key findings regarding investor ESG data provider usage and support of voluntary ESG disclosure regimes
Universe of ESG Data Providers Used by Institutional Investors is Contained
Our research found that the vast majority of institutional investors rely on one or more of 39 different external ESG data providers. We found MSCI to be the most frequently used data provider across investors. Several industry or topic-specific providers, such as S&P Trucost and the Global Real Estate Sustainability Benchmark (GRESB), also cracked the top 10 list. Companies must understand their shareholders’ use of the diverse range of data providers. It is beneficial to focus ESG integration priorities, time and resources on the ESG ratings and rankings most influential to their shareholders. Surprisingly, popular platforms like Bloomberg appeared to be less relied upon for ESG data than anticipated, and platforms like Vigeo Eiris seem to have gained popularity following Moody’s acquisition of a majority stake in the firm.
More importantly, investors are increasingly building out their own ESG-dedicated teams and developing proprietary platforms with bespoke rating systems to align scores with the engagement priorities, voting guidelines and sustainability convictions of the institutions. Just under 40% of investors developed proprietary ESG platforms. The need to develop their own ESG scores is a commentary on both the lack of consistency across rating providers and the evolution of investors’ ESG theses. This trend will likely continue to grow, further underscoring the need for engagement with investors to understand their priorities and ESG integration processes.
Investors’ ESG Reporting Expectations
Within the last two years, institutional investors have notably accelerated revisions in their voting guidelines to codify ESG reporting expectations. BlackRock has received significant attention for its expectations, which rapidly translated into voting decisions in the 2021 proxy season. In our analysis of the twelve ESG reporting standards and frameworks favored by investors, we found five to be most prevalent: SASB, IIRC (both of whom recently merged, creating the new Value Reporting Foundation), TCFD, CDP, and GRI. Notably, a company’s investor base and geographic location of domicile significantly further narrow which frameworks are most relevant, underscoring the need to understand key investor expectations, particularly in ESG report development.
The key thematic environmental topics most often cited in investor stewardship priorities most relevant to their evaluation of issues were:
- climate change risk management,
- GHG emissions, and
- water management.
With regard to social issues, notwithstanding investors’ vocal focus on employee health & safety and diversity, equity & inclusion in the second half of 2020, those issues ranked numbers three and two, respectively, with human rights issues claiming the number one spot.