Transparent ESG metrics power smarter fund investments
With more than $120tn worth of assets under management globally, investors have an important role to play in advancing environmental sustainability. Through impact investing, asset managers can encourage the allocation of capital towards improving – and proving – companies’ green credentials and innovation, and play an essential part in tackling climate change.
Fund managers’ efforts, alongside government endeavours, are vital to improve permit systems, incentives and regulations, educational programmes to upskill populations on sustainability, and businesses’ changes to standard practice.
Yet there are major hurdles for funds when it comes to directing investments towards achieving sustainability. Most notably, fund managers require a deep understanding of businesses’ ESG performance, with forward-looking insights on potential upsides and risks, while being able to benchmark against the sector.
“The investment industry is under unprecedented pressure to advance sustainability and stop greenwashing, and it needs a much clearer picture to inform its decisions,” explains Jonas Rooze, head of sustainability and climate research at BloombergNEF, a research provider focused on the low carbon economy.
As expectations rise for funds to transparently deliver on ESG promises to investors, many are finding their own sources of information deeply lacking in nuance, robustness and actionability.
“It’s becoming harder for them to effectively assess the winners and losers of the future, particularly in terms of the effects climate change and sustainable innovations will have on these businesses’ long-term performance,” Rooze warns.
“Much of the data is unreliable and oversimplified, simply looking at carbon emissions and pricing, which is a modelling shortcut.”
Fund managers are constantly pitched newer data-based solutions to these challenges, many of which proffer a singular score summing up all aspects of sustainability. But in reality, one number can never encapsulate the totality of pertinent information, Rooze says. “Fund managers find themselves asking: is this data transparent? Can I really believe in it? Is it relevant? There are a lot of ‘too good to be true’ systems.”
Instead, to be confident that they are making and holding sustainable investments, funds need a view of the much deeper forces at play, and of the likely material impacts of their choices. This means knowing how demand for products and services might shift given different societal trends and environmental conditions. It involves understanding where disruptive opportunities could arise or environmental risks emerge - not only for the businesses immediately affected, but for those further down the value chain.
“This necessitates a view of all sustainability aspects affecting those businesses, and these include their long-term climate change targets, internal and supply chain emissions disclosures, innovations around solar energy, batteries and biofuels, and the shifting regulatory mandates.”
Leading fund managers are already working with Bloomberg to harness these insights, which are fully integrated within the Bloomberg Terminal. Users can access data, analytics, research and news across all asset classes – from corporate stocks and bonds, to municipal bonds and sovereign debt – applying it from initial scoring and filtering, on to management of assets, and up to the end stage of reporting.
As a result, they can swiftly move from a blinkered view of ESG as a risk topic alone, towards a perspective that incorporates the strong potential upsides in long-term growth, efficiency and competitiveness. Armed with these insights - at asset, fund, and sector levels - managers can find opportunities, track performance, spot red flags, adjust holdings, and report as needed.
“Fund managers typically have their own ESG scorecards, and they can slice and dice our data to complete them with accuracy, understanding exactly how they are positioned, what’s changing, and giving them the ability to disclose actions to regulators and clients,” Torres explains. “They need to know that every choice is justifiable, effective and explainable.”
Bloomberg’s data incorporates metrics aligned with all major global standards - including Sustainability Accounting Standards Board (SASB) disclosure standards, and the EU’s Sustainable Finance Disclosure Regulation (SFDR) reporting, which mandates declarations on ‘principal adverse indicators’ covering a broad range of sustainable finance concerns.
Timely, transparent data
On a daily basis, fund managers use Bloomberg’s sustainability data in several core ways - from BloombergNEF insights on the low carbon economy, to standard-aligned indices and metrics. When considering new investments, they assess companies’ current sustainability status and mid-to-long-term potential.
At any relevant point, they can spot changes in the sustainability credentials of their current investments. Whenever they receive requests for information from investors, they can transparently and robustly justify their decisions and explain performance - and at every regulatory stage, they can report confidently on all metrics.
Every part of this journey depends on verifiable accuracy. “Transparency is one of our core principles,” explains Torres. “Fund managers absolutely need to know where their data has come from, so they can confidently take action. As well as being easy to access and interpret, our data can also be quickly interrogated down to its source.”
The growing popularity of these effective insights, and the maturity with which many funds are using them, is seeing asset managers move away from a policy of mass ESG investment, towards a more targeted allocation of capital into credibly sustainable assets, Rooze notes. “There’s a definite shift from quantity to quality. Fund managers know that as well as simply having the willingness to do better, using reliable tools means they can consistently make the right decisions,” he says.
As funds play their important part in global sustainability efforts, Torres hopes there will be a concurrent rise in the determination of individual investors of all wealth levels. “As countries develop ESG skills and capacities, asset owners will powerfully drive transformation, through robust performance indicators and requests for information,” she concludes. “Their demands on these priorities will have game-changing impacts on sustainability.”
Q&A: Navigating new sustainable and ESG fund regulations
Data insights and indices can help give direction in a fast changing market, says Chris Hackel, head of sustainable indices at Bloomberg
What are the main ESG challenges for fund managers?
There’s been a proliferation of regulation around ESG, climate and sustainable funds. The introduction of disclosure and labelling, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), is necessary to bring clarity and transparency. However, other regulations are still under development, leading to fund managers being hesitant to label funds.
We’ve recently seen a wave of funds downgraded from Article 9, the EU’s highest sustainability designation, to Article 8. According to Bloomberg Intelligence, in the fourth quarter of 2022, roughly $57 billion of assets across more than 70 exchange traded funds were reclassified. Fund managers remain highly motivated to launch labelled ESG and sustainable funds, but in the near term we anticipate fewer Article 9 funds being created.
How can data insights and indices help?
The Bloomberg Sustainable Indices team continues to create new indices that target specific objectives. Earlier this year, we launched the Bloomberg Global Aggregate GSS (Green, Social, and Sustainability) Bond Index, which includes only bonds that have their proceeds designated for environmental or social objectives. Many investment managers have retained the Article 9 designation for their green bond funds. We are also developing indices with our rich set of EU taxonomy fields, including what percentage of a company’s revenues substantially contribute to aligned activities.
In the current environment, it’s crucial that we make available all of the sustainable or ESG fields, factors, and data that fund managers need for regulatory labelled funds and products, and for indices based on their own priorities. Bloomberg has developed multiple tools on the Terminal with transparent methodologies, which fund managers can use to develop analytics, including on coverage and portfolio exposure to mandatory fields in SFDR reports, sectorial and aggregated carbon emissions of portfolios, or benchmarking of ESG debt decomposition in fixed income.
How have Bloomberg Sustainable Indices evolved?
Sustainable and ESG investing approaches have changed at an incredible pace in recent years. Prior to that, sustainable investing was fairly straightforward, consisting primarily of values-based company exclusions or ESG score integration. Sustainable investing now also encompasses net-zero-aligned funds, impact investment, and themes from gender equality to clean energy.
As an index provider, we help fund managers advance sustainable investment through benchmarks that capture and represent performance and risk characteristics – alongside sustainable characteristics including ESG scores, principal adverse impacts, and emissions profiles. We aim to offer solutions for diverse approaches to sustainability, with a focus on transparency in our methodology and data.
How do fund managers use these insights to succeed?
There are billions of dollars invested in funds and products referencing Bloomberg ESG, climate, impact, and thematically sustainable indices. Fund managers work with us because of the insights we provide, and because of their confidence in the quality and transparency of our solutions. There is tremendous innovation happening in sustainable investment, and Bloomberg offers managers the capabilities and flexibility to benchmark and meet specific targets.
Our indices also add value to the market by measuring and representing the dynamics of specific segments being impacted, as the world transitions to low carbon. Here, we use data and expertise from teams trusted by the investment community such as Bloomberg Sustainable Finance Solutions, BloombergNEF and Bloomberg Intelligence to inform index construction. We have launched indices focused on clean energy, renewables, transition metals and more.
What excites you about the future?
Sustainable investing is still in its infancy. We’re invigorated by working on new themes such as nature and biodiversity and the expansion of sustainable investment into different asset classes. Recent initiatives include a ‘Carbon Tilted’ version of our BCOM commodity index, as well as indices benchmarking commodities essential for climate transition. Development is underway on a version of the Bloomberg US Municipal Bond Index that integrates ESG scores, complementing our Municipal Impact Index. We’re also researching climate and social themes in mortgage-backed securities.
We are incredibly excited about the potential impact of sustainable investment on societies, economies, and the planet.
To find out more about transparent metrics and data for effective fund ESG investments, visit bloomberg.com/esg