Data issues aren’t going away

Undaunted by the ESG challenge
Introducing the series
This is the third article in our new series, which looks at environmental, social and governance issues in the fixed income space.
Our unfixed approach
In the spirit of (un)fixed income – bold, innovative and flexible – we start each piece with an ESG challenge before flipping it on its head.
Answering the big questions
The aim of this series? To explore how investors can successfully navigate some of the greatest issues of our age.

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. 

Figure 1: Barriers to ESG adoption
data issues

Source: BNP Paribas, ESG Global Survey, 2021.

Transforming data inefficiencies into opportunities

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. 

Figure 2: ‘Global plug-in electric vehicle market share in the first half of 2021, by main producer’

Source: Statista and Worldwide figures covering, H1 2021.

The importance of engagement

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.

Looking forwards

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.

Discover (un)fixed income

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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.

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