At Verger we are committed to Engagement – an ongoing dialogue with our clients and industry peers around continued evolution and growth.
As part of this dialogue, we at Verger seek to understand how the managers with whom we invest client capital are navigating increasingly complex investment risks and opportunities, including any related to Environmental, Social, and Governance (ESG) factors.
Through the course of our ongoing engagement with current and prospective portfolio managers, we have noticed more of them pointing out how the increasing availability of Environmental, Social, and Governance (ESG) information impacts their investment decision making processes.
Recently, Verger published a White Paper – the second in our Investing in the Lives of Others series – in which we map the current ESG information landscape and explore potential competitive advantages that can accrue to managers who understand the terrain.
Here, we’ve taken some time to summarize this latest White Paper: The ESG Information Ecosystem for Non-Profit Investment Management.
ESG Information & Verger’s Investment Process
In a recent interview with our Investment Team, we highlighted how the select group of managers we choose to spend time with have, as part of this dialogue, become much more proactive in sharing their ESG outlooks. For example, they often volunteer their views on which ESG factors are material to their investments, and how the increasing availability of ESG information impacts their decision making.
We ask managers to shed light on the specific types or sources of ESG information, and the underlying ESG data or metrics they use to assess companies. While this insight provides us with useful information about how they might be synthesizing information differently or more effectively than their competitors, it also informs our views on how ESG factors can materially impact risk and return sources over time.
Tackling Global ESG Reporting Challenges
While we have observed a clear global trend towards ESG and sustainability reporting, especially in public markets, we have also heard concerns about the inconsistencies of ESG information from a variety of our managers across geographies and asset classes.
Our managers are not alone in these concerns. Globally, companies seeking to disclose ESG information must navigate a wide range of ESG standards and frameworks and stay nimble enough to address pending changes from several different regulators.
While some companies point to fragmentation of the ESG information landscape as a reason for delaying action on reporting, there are a series of global trends pointing to an emerging consensus for ESG reporting standards.
Demystifying the ESG Information Ecosystem
In our White Paper, we break the ESG Information Ecosystem into the following five layers, and explore each of them and their respective governing bodies in depth:
- ESG disclosure regulations and requirements
- Key ESG standards
- Key ESG frameworks
- Company reporting
- Ratings and ranking providers
Throughout our exploration, we point to interconnected trends in each of the layers as evidence of coalescing global ESG reporting standards.
Why It Matters
The landscape here is complex. We chose the word ecosystem carefully – it reflects the idea that each layer is interconnected and there is a cycle by which information flows in multiple directions.
Because the system is complex, and still evolving, we believe that managers who are watching the space closely and taking early action to align their practices with coalescing global standards may be able to attain a competitive advantage over their peers.
We at Verger see the opportunities for competitive advantages as follows:
- Companies making efforts now to align with emerging consensus reporting standards will likely require less time and resources to come into compliance with future regulations.
- Managers with access to ESG information and experience incorporating the information into their investment process will likely require less time and resources to adjust and adapt as regulations are finalized and adopted.
- Early moving managers have likely accrued experience and insight that can help them distinguish between policies and procedures and meaningful application and performance towards goals.
- Early moving managers likely have an easier time attracting and retaining a talent pool that is equipped to navigate the unique challenges associated with ESG and sustainability information.
We are not looking to tell companies or managers what ESG information to use or how to use it. Instead, we are curious to learn about how ESG factors fit into their processes through our ongoing engagement. In the full White Paper, we provide sample engagement questions for portfolio managers that help start the conversation.
While some companies will continue pointing to the track record of fragmentation in the ESG Information Ecosystem as a reason for delaying robust reporting, we believe, and indeed, expect, that our current and prospective portfolio managers recognize shifting trends and act accordingly.