Problems with ESG data are a running theme across the industry. This is something we have discussed at length in this article series – and the issue isn’t going away any time soon.
In a survey carried out by BNP Paribas, 51% of respondents stated that challenges around data quality and consistency acted as a significant barrier to ESG adoption, as shown in Figure 1.
Source: BNP Paribas, ESG Global Survey, 2021.
Despite the challenges experienced across the industry, a case study from one of our fixed income teams at Invesco highlights how active investors can transform data inefficiencies into active advantages.
The team draws attention to Volkswagen, noting that external ESG data providers typically score the company poorly. Clouded by the legacy of Dieselgate, ratings agencies overlook the progress that the company has made in the last seven years.
In the investment team’s view, the scandal actually prompted Volkswagen to get ahead of other mass market manufacturers with vehicle electrification (Figure 2). What’s more, it forced Volkswagen to cut costs, thereby improving profitability as a result.
Source: Statista and EV-Volumes.com. Worldwide figures covering, H1 2021.
Tom Hemmant (Fixed Interest Fund Manager) stresses the importance of thorough ESG research and engagement processes, particularly in instances where publicly available data doesn’t tell you the full story. ‘It’s about attempting to tackle the difficult questions and financing those companies that are changing and making efforts’, he added.
Engagement is perhaps even more important when investee companies are privately owned – something our private credit team will attest to. Given the lack of third party ESG data available in this area – reliable or otherwise – the issue of accuracy becomes a moot point. The information simply doesn’t exist.
In a webinar held by Invesco last year, Kristofer Dreiman (Head of Responsible Investments at Swedish insurer Länsförsäkringar) drew attention to the fact that only about 10% of the companies he invests in actually have any outside information related to ESG. ‘That information simply isn’t available in the private credit space’, he added.
At Invesco, our private credit team has developed its own proprietary ratings system based on information collected through due diligence conversations and questionnaires. The team simply refuses to invest in companies that will not engage.
And, of course, it’s not just active fixed income solutions that can benefit from the power of engagement either. Many of the engagements led by our in-house ESG team at Invesco pertain to our entire physically invested solutions range. In other words, passive investors benefit from our active engagement processes.
Improving data quality and transparency is a big objective for the industry – and we have had some progress.
In her 2022 outlook, Cathrine de Coninck-Lopez (Invesco’s Global Head of ESG) drew particular attention to the creation of the International Sustainability Standards Board, which ‘sets a line in the sand for global standards on ESG reporting […and] will go a long way in feeding more standardised metrics and data into our systems’.
However, until these developments are further along – and we suspect even then – inefficiencies in the data create opportunities that our teams can actively exploit.
We know investors are living through an unprecedented period of market disruption and volatility. As we face these new realities, we think taking an unfixed approach to fixed income is an advantage.
From active to passive, from mainstream to innovative, we have the expertise, the strategies and the flexibility needed to match your objectives as markets evolve.
A growing portion of bank loan clients are interested in ESG. But they need a quantifiable approach and investment teams that will actively engage with management. Find out how we address these needs at Invesco.
In this paper we describe how Invesco Fixed Income (IFI) can deliver a Global Buy and Maintain solution that significantly reduces the carbon intensity of a portfolio without sacrificing diversification or overall yield expectation.
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