The investors were clear that ESG is not a monolith (and the term “ESG” is a shorthand that likely is overused). The type of ESG information investors seek is not uniform. For example, fixed-income investors don’t invest the same way that equity investors do; credit investors may be more focused on downside risk within the tenor and call structure of the debt. That may narrow the set of both financial and nonfinancial indicators relevant to that investor. When a fixed-income investor is engaging with the company, they’re more likely to engage with finance rather than investor relations and ask about shorter-term risks and risks that have the potential to be acute.
3. ESG data ecosystem
Integration of ESG issues into investment management is becoming increasingly sophisticated. Investors are using judgment, industry expertise and sustainability-issue awareness to drive analysis, products and strategies. For data to be useful, it should be relevant and related to the primary activities of the company. The investors indicated that a materiality lens can provide this focus, lessening the tendency for companies to lose their ESG narrative in peripheral or largely irrelevant topics.
The significance of ESG issues also varies significantly by sector, with sector analysts adding ESG benchmarking, on material issues, to existing peer comparison approaches. Consequently, sophisticated investors are looking beyond a headline ESG rating, drilling into the most critical data points by sector and comparing across peer groups. Depending on sectors, those data points could be carbon intensities, waste intensities, employee turnover, diversity rates and injury rates. How do these look over time? Is there momentum? How do they compare? Has a company set targets? What was the basis of those targets? Is it decarbonizing faster or slower than its peers?
Companies should develop a very clear narrative for the capital markets, embedding ESG consistently across its disclosure footprint. Ongoing, year-round engagement with institutional investors can help with rigor and focus.