By Simon Robinson, Director – Product Management at Moody’s Analytics
The progress of industrial revolutions rarely follows a neat, linear path. Instead, we typically see periodic spikes of innovation, prompted by some external factor, followed by the introduction of standardized manufacturing processes yielding greater productivity and efficiency, and leading to a step change in industry norms. While images of smoking chimneys may not immediately resonate with the concept of ESG investment, there are many parallels. We find ourselves on the cusp of a period of transformation in this area—specifically in how ESG investment is managed and supported.
The last few years have seen a groundswell of interest in ESG investment. According to the most recent public report, as of 2018, there was more than $30.7 trillion in global sustainable assets under management across five major markets (see figure).
Sources: Global Sustainable Investment Alliance, Moody’s Investors Service
Enthusiasm from investors, buoyed by ESG investment performance, underscores that it is more than simply “a good thing” from an ethical perspective, and has drawn increasing focus from the asset management community on the financial implications. Unsurprisingly, technology firms and data providers have rushed to meet demand, releasing many new tools and solutions to the market.
Many financial institutions have made a concerted effort to incorporate ESG principles into their investment decisions: assessing their activity, reviewing standards, and increasing their level of reporting in this area. Many asset management firms have appointed a head of ESG to their executive management team to lead these efforts.
Beyond the focus on financially material ESG risks and opportunities, the socially responsible investment movement1 has joined employee and consumer activism in looking to hold companies accountable for their impact on the society and the environment, and to reward sustainable business practices.
Regulations Vary Significantly by Region
Naturally, all of this has brought with it a greater focus from regulatory bodies, although the response has varied considerably between the US, UK, and EU. The UK government has put forward proposals to require occupational pension schemes with £5 billion or more in assets and all authorized master trusts (there are currently more than 100 such schemes in the UK) to publish climate risk disclosures by the end of 2022. In the EU, the European Commission has been working to establish a framework to facilitate sustainable investment, bringing the Taxonomy Regulation into force in July of this year.
The most recent publicly available study on the Non-Financial Reporting Directive from the European Commission uncovered, among other things, very strong support for common standards (82% of respondents), strong support for digitalization of non-financial data (64%), and near-universal concerns about the interaction between different pieces of sustainability-reporting legislation—only 3% of respondents believe that these interactions currently work well. This push for standardization is reflected in the current work on the EU Green Bond Standard, which aims to establish uniformity in this important area across the EU.
By contrast, in the US, the SEC has yet to mandate ESG disclosures. In addition, the US Department of Labor’s recently published proposal around ESG disclosures indicates that the Employee Retirement Income Security Act (ERISA) plan fiduciaries’ main responsibility should be to employ an investment strategy that is designed to achieve the best financial outcome for plan members. If an ESG-driven strategy is being employed, plan fiduciaries may have to justify that it is expected to be a higher-returning strategy, or a lower-risk one, such that the plan members’ financial position is not being compromised for the purpose of non-financial objectives.
Oversight Is Essential
This picture of the ‘industrialization’ of ESG investing is complex and evolving rapidly. What is clear, and seems to be the consensus among affected firms, is that they can no longer act in this space and attribute their efforts to generalized ESG principles, without oversight: the formerly “wild west” nature of the ESG landscape is becoming regulated, and asset managers need to be prepared to act accordingly.
We hear and see that asset owners are increasingly scrutinizing their ESG investments, wanting more in the way of reporting, meaningful impact, and alignment with existing ESG standards and market best practices.
However, the divergence in regulations globally is challenging. There are differing standards for voluntary ESG disclosures—from the Sustainability Accounting Standards Board to the Global Reporting Initiative, the Carbon Disclosure Project in the UK, and the U.N. Global Compact—all with different requirements and principles around application and understanding of what the standards should be. Unsurprisingly, this leads to challenges for asset managers who are looking to manage their funds and client portfolios to these disparate standards.
Recently, the International Organization of Securities Commissions announced a task force that will look for “commonalities” among the various global standards to create a “more cohesive, more transparent … standardized” form of ESG disclosures.
Inconsistent ESG Ratings Present Another Challenge
Layered on top of this is the diverse landscape of ESG ratings and assessments. There are many ESG rating providers, measuring different things, so ESG ratings do not always correlate well with each other. This makes it difficult for asset managers to know which ESG factors to look for and, consequently, which ESG ratings to use. In a recent survey of asset managers, we conducted in conjunction with Pensions & Investments, 71% of respondents said they were currently unable to view the performance attribution of ESG investment factors—despite wide industry desire for this type of information.
The market is calling for the creation of one global language for ESG. But this is by no means straightforward or quick to achieve. What’s required to manage this complex and evolving landscape are agile and flexible tools, which can adapt easily to changing data sources, standards, and reporting mechanisms. Those solutions that are able to draw in many and varied forms of data and present a single view, and those that accurately piece together a previously fragmented picture in a consistent way to deliver actionable insights, will be the ones that move the industry forward as ESG moves towards its more standardized future.
1As used here, the term “socially responsible investment” is meant to describe investment strategies incorporating considerations that may not have a financial impact but are deemed relevant from an ethical or moral standpoint.
This sponsored content was not written by the editors of the newspaper, Pensions & Investments, and does not represent the views of the publication, or its parent company, Crain Communications.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
