asset manager ESG

ESG and Diversity, Equality and Inclusion Data. What does good look like?

Diligend was joined by representatives from AIMA and the PRI to discuss ESG and diversity data, and the question "What does good look like?". An enlightening session with signposts to regulations, frameworks and projects that are gathering pace.


 

Welcome and Introduction to Diligend

Fiona Sherwood, CMO, Diligend

So, hi, everyone. Thank you for joining us. My name is Fiona Sherwood. I'm the Chief Marketing Officer for Diligend. If you don't know us, we've built a digital platform for the investment sector, it automates and simplifies the process of due diligence and monitoring, data collection or response. And we have our two panellists. So, Chloe, welcome, please, could you introduce yourself?

 

Introduction to Chloe Horne at the Principles for Responsible Investment

Chloe Horne, Specialist, Stewardship, Principles for Responsible Investment

Thanks for having me today. It's really great to be here. My name is Chloe Horne. I'm a stewardship specialist at the Principles for Responsible Investment or the PRI, where I focus on stewardship and human rights and social issues with a specific focus on diversity, equity and inclusion. And I recently co-authored our first position paper on how investors can address DEI. And for those of you not familiar with the PRI, we are a UN-backed organisation, and a proponent of responsible investment, where we seek to support investment signatory organisations to implement ESG issues into their investment and active ownership decisions.

 

Introduction to Adam Jacobs-Dean at AIMA

Adam Jacobs-Dean, Managing Director, Global Head of Markets Regulation, AIMA

Hi there, I’m Adam Jacobs-Dean, I head up the Markets Governance and Innovation team at the Alternative Investment Management Association, AIMA. For those who don't know us, we're a global trade association representing the alternative investment management sector, primarily hedge funds and private credit firms. And then in terms of my work, as well as focusing on issues related to markets regulation, I also look after our work on responsible investment, and ESG, which tends to span both issues related to market practice, and also regulatory questions. And very pleased to be joining today.


The ESG and DEI data landscapes are complex

Fiona Sherwood

Thank you. So, I think, really, it would be impossible to miss the increased focus on ESG, and diversity. And certainly, for us, our allocator and manager clients, we've all got increasing data requirements, and whether that's collecting data from managers, third parties, or portfolio companies, or whether that's providing data to investors, shareholders and other stakeholder groups. So, I knew this topic would be complex to cover in 60 minutes, but when we started talking, Chloe, Adam and I, we I realised just how mammoth the task was.


We all tend to talk about ESG and DEI in the same breath. But actually, whilst they are under the same umbrella, they're very different. And they do require very different approaches to data. I'm sure you are all fully aware of that. And luckily, we've got Adam approaching it through an alternative investment lens, and Chloe's bringing her DEI expertise. I don't know if you've looked at their bios, but they're both incredibly experienced and have both worked for the UK regulator at different times, so I think we're in very safe hands today. If you have any questions throughout, please just put them in the Q&A and we'll try and answer them on an ongoing basis, rather than doing them all at the end.
So I think with that, let's get going.
So, Adam ESG, and social responsibility issues have been part of the landscape really since the 60s. But actually, they've gathered pace, haven't they, over the last few years, particularly since the pandemic. In your opinion, what do you think's driving that?

 

Drivers of demand for ESG data

Adam Jacobs-Dean

I look at it, I suppose from the point of view of hedge funds, it's definitely the investor interest. And to your point, this is in some respects, not new as an area of focus, but investors have increasingly taken the mindset of responsible investment and then started to apply it to investment classes that maybe historically, were less the focus for them and for our industry - the alternative investment management industry – which means that our firms are seeing far more investor scrutiny therefore, they're doing much more in the due diligence process and how they go about it.

Dealing with sustainability issues could be from the point of view of risk/reward, or it could start straying more into issues of impacts and the externalities associated with your investments.

And then I suppose the trend that's interesting alongside that is regulation. And in some respects, the investor demand came first. But what's quite interesting to see is how the increase in the level of regulatory disclosure obligations, particularly in the EU, with the Sustainable Finance Disclosure, Regulation, has really been a prompt for investors to further scrutinise what their external managers are doing. And the very fact of having to, under SFDR, essentially tier products depending on the degree to which they pursue ESG issues, with enhanced disclosures, (the more you do, the more you have to disclose) has become a prompt for investors to say, “well, that's something we're interested in, so could we hear more about that?” And so, I think that's the interesting trend, is the way in which the investor demand and regulation can be self-enforcing, in a way.

 

Are firms making the connection between a more diverse workforce and commercial success?

Fiona Sherwood

Yes, it's cyclical, isn't it? And we, you know, when we look at DEI, years of inequality, and some recent really high profile, gender and race related events have built up a head of steam, haven't they? And it now feels like the world is kind of recognising that it's not only morally right to foster inclusivity, equality, diversity, but that diverse workforce can drive economic growth and profitability. Are you seeing that in your role Chloe? Do you think firms are making the connection between a more diverse workforce and commercial success?

DEI is linked to company outperformance

Chloe Horne

Yeah, for sure. And I think what's interesting is that investors are seeing this from different angles. So we're increasingly seeing investors understanding that DEI has a basis in human rights. And that's set out in the Universal Declaration of Human Rights and the ILO standards. And for that reason, investors have a responsibility to address DEI. And like Adam said, governments and policymakers are increasingly introducing regulations when it comes to DEI and I'm sure we'll probably touch on that a bit later.

But what's interesting, as well, is I think we're seeing beneficiaries starting to see the link between DEI and their investments. And I think it was a recent survey by PensionBee that found that over 50%, of savers would like to see the companies and their investments disclose their ethnicity pay gaps, and that obviously, is being translated into interest from asset owners. And we're seeing, more efforts from asset owners to collect this type of diversity data from their managers. But I think what's the most interesting thing here is that there's always been an understanding that there's a link between DEI and company outperformance, and certainly when it comes to that idiosyncratic risk, but what we're seeing now is that investors, especially those diversified investors are understanding that performance is often linked to the global economy performance.

And so they're starting to the systemic risk associated with DEI that comes from things like global racial wealth gaps, and so we're definitely seeing more efforts at the system level. But I think with that, the interesting thing that we're seeing is that the traditional parameters when it comes to DEI has been broadened. So, rather than for example, focusing solely on gender, which is, of course, still very important, we want to see investors doing that. We're seeing other identities and characteristics coming to scope. You mentioned, recent tragic events, like the murder of George Floyd. That has meant that investors are starting to focus a bit more on ethnicity and race, but also seeing things like economic backgrounds and disability and LGBTQ plus come into scope as well. So yes, lots of changes happening over and over the last couple of years. And I'm sure we'll see more improvements as we go on too.

 

Regional differences in the approach to ESG

Fiona Sherwood

Yeah, absolutely. Are there regional differences in the approaches. I mean, for ESG, I don't do you think regional differences in the focus?

 

ESG and DEI have different emphases around the world

Adam Jacobs-Dean

There is definitely a regional divide when it comes to ESG as an area, and I suppose the characterization that you often hear is that Europe is ahead of, for example, where the US is. To some extent, you could say that's true, but I think that can also overlook some of the distinctions in terms of focus across jurisdiction. And, for example, in North America, a focus on DEI at management company level is much more established than you would see at the moment in the UK or indeed in the rest of Europe.

And I suppose, how you translate that into issues of data, you could say on the one hand, you will have aspects of your data needs that are somewhat universal in nature. So, if you're interested in emissions, then metrics related to carbon intensity are probably going to be broadly, the thing you will need regardless of the jurisdiction in which you're operating or the corporates in which you invest.

But DEI, on the other hand, is a sphere, where the tends to be much more of a regional focus, in terms of how people go about collecting and processing data to make sure that their approach is responsive to the local context. So, you can take the example of data on ethnicity, if you're looking at North American data set, then you might be interested in data on Hispanic individuals or individuals with that heritage. Whereas in Europe, that won't necessarily resonate in the same way, given cultural differences.

Then another point would be, for example, veteran status in the US is something that is generally considered less of a focus in the UK or Europe. So that can be distinctions in terms of how you see data and present data, sometimes reflecting statutory obligations in different regions as well.

DEI differences in different regions

Fiona Sherwood

Chloe do you find that too in your experience? Pretty big differences between regions?

Chloe Horne

Yeah, for sure. And I think this is one of the reasons why some investors find DEI data collection. So challenging, because this really does vary depending on the country taking into account things like the culture, the makeup of the population, laws and regulations, and also power dynamics within the country.

Adam mentioned veterans in the US, which was a big focus, and things like indigenous communities, and ethnicity more broadly, which has been driven by things like the Civil Rights Movement, which has led to affirmative action rules. And what you tend to see is stewardship action being determined by those differences. So, over the last couple of years, we've seen a growth in resolutions focused on things like audits related to racial equity and civil rights, which is been mostly focused in the US because of the context there.

But this really contrasts to, for example, Japan, where the country is quite racially homogenous, and there's also an ageing population. And so, the focus has very much been on what the Prime Minister calls Womenomics, which I have always struggled to say, but which is basically a focus on women in the workplace. And so, the interventions you tend to see there are around childcare, and enabling women to work in an office or in a workplace. And so, the types of engagement and diversity data you get asked for is around gender diversity.

So yeah, and I think just to draw on one more example, in Australia, given the historical context, the focus is very much on cultural diversity, which encompasses things like ethnicity, language groups, and indigenous communities. So, the focus, there is a bit more on things like protection of World Heritage Sites, or indigenous community representation on company boards. It really does vary.

And I think what's quite interesting to get a sense of where companies are in their journey and countries is to look at investor policies and proxy advisor policies, because those policies will really vary depending on the region that the company is based in. So, you might vote against board directors in the US if there's less than 30% women on the board. But in a country where they're still in the early stages, when it comes to DEI they might bring that down to one woman on the board. And so that's really a good indication of how things do vary by different country.

Fiona Sherwood

And that must make it really hard for global businesses, actually.

Chloe Horne

Yeah, absolutely.

Regulatory drivers of ESG and DEI data collection

Fiona Sherwood

And what about some of the regulatory drivers? I mean, obviously, they vary from region to region as well. I mean, we all know about GDPR in Europe, and the requirements around personal data collection and processing, but are there any other things to be aware of in the DEI space?

Chloe Horne

Yes, looking at DEI data more generally, I think you tend to get that common minimum ground when it comes to promoting equality between women and men. And you tend to see that a bit more present across all jurisdictions.

But drawing on a few that go a step further. In Portugal, they have something called the social balance law, which asks companies to maintain a five year record of things like their recruitment processes, and working conditions and they break that down by sex. So that's quite interesting and probably can tell you a lot about an organisation.

And then in the UK, we obviously know about the gender pay gap reporting and the FCA has just introduced rules around listed companies reporting on representation of women and employees of colour in senior leadership positions and even France, this is a really interesting case. And I think one that people talk about quite a lot. They have quite good policies like gender pay gap reporting. But they also have policies around prohibiting companies from collecting data on ethnicity, which, obviously, there are historical reasons behind that. But it's quite interesting.

We tend to hear from investors that it's really difficult to focus on things like ethnicity, if you don't know where you are, you don't know the types of interventions to use, and you don't know if they're doing well or not. And so, what you tend to see is companies working out how they can still find out about that without collecting the data. So, you tend to see companies collecting data around things like socioeconomic background, because we know that's quite closely linked to ethnicity.

But I think what's really encouraging is we're seeing these types of expectations being set by non-governmental bodies as well. So, for example, companies listed on the NASDAQ exchange, these now publicly disclose the level of diversity on their board of directors, and we're increasingly seeing these types of requirements from other stakeholders beyond policymakers. And I think these are growing day by day. So, it'll be interesting to see where we end up with this, too.


Which ESG regulations are gathering the most pace?

Fiona Sherwood

Yeah, absolutely. And Adam, from an ESG perspective, over here, the EU taxonomy and SFDR, which you've mentioned, seems to be leading the charge. But are there any other regulations out there? I know the SEC has proposed ESG regulations, how are they being received? Are they achievable? Are they aspirational? What do you think?


Adam Jacobs-Dean

I mean, it's definitely the case that regulation is high on the list of things that people have focused on, as you say in in Europe that feels like there has been a headstart on the part of the European Commission with the EU taxonomy and SFDR. But other jurisdictions are catching up.

And to your question, the SEC is actively in the process of rewriting its rules to build a bigger focus on sustainability issues. So, they've made proposals around corporate climate disclosures, which, generally speaking from the investment management perspective, is welcome because we need corporate data, as an industry to be able to integrate ESG considerations into the investment process. So, anything that maximises that data set and make sure data is disclosed on a consistent basis is good. From our perspective.

The big unknown in the US is what they'll do when it comes to disclosure by investment managers themselves about how they deal with sustainability issues. And in fact, I think this week, the SEC is due to publish proposed rulemaking on Investment Management disclosures.
So, there'll be an interesting one to see how far they replicate the logic of SFDR.

One thing that's worth highlighting in that context is in Europe, you've really got a maximalist approach where every fund and product is subject to the disclosure rule. So, it doesn't matter whether you set out in the first instance to offer a sustainability linked product or product that's badged as being ESG.

In some ways, the rules are universal. So, you have to make some baseline disclosure regardless. Whereas an alternative logic is you just target rules, specifically to products that make very overt green claims or have something about their name that could be taken as an indication about what they offer?

And it's to the question of whether the rules end up being workable. I think that's a big one is how broad will the US regime be in its reach? And how much will it focus on what every fund is doing versus a narrow subset with really make green claims? That certainly regulation across the board has been a huge, huge challenge for firms to navigate?


How difficult is it to quantify ESG data across different firms and firm types?

Fiona Sherwood

We'll have to have another chat about that once, once we’re a bit further on. We've just talked about how difficult ESG data is to quantify. Do you think Adam, it's harder for some firms and some different types of firms? I know, you talked earlier about hedge funds. Are you seeing those differences and different challenges across those different firm types?


Adam Jacobs-Dean

It is and it's definitely a reflection of what precisely you invest in, because if you invest in developed market securities, then you've probably got a reasonable data set, you might find that disclosures are not necessarily made on a comparable basis by companies, but you should be able to find a reasonable amount of data out there.

The comparability issue is challenging still, because you take the example of workplace injuries. You might have some companies disclosing on the basis of days lost to injury, some companies disclose on the basis of number of injuries, so it can vary. But then if you take sectors like emerging markets, you might find that the availability of data is much poorer. So your starting point is a much less rich data set, which is potentially a challenge in terms of taking a meaningful stance on ESG issues.

And then it's very easy to get drawn into the discussion about what corporate data is out there. And then almost overlooked the fact that there are plenty of investment strategies for which investment in corporate securities is not the core focus of the strategy. So, if you're a manager trading sovereigns, for example, with sovereign exposure, how do you go about navigating ESG considerations in that context?

And then there's, of course, the distinction between public and private markets where, if you're investing in a private space, you might have to work much more actively with the companies in which you invest, to encourage them to give you the information that you would say is useful from the point of view of being able to scrutinise what they're doing when it comes to ESG. And even building incentives into your relationship with them, if it's a loan-based arrangement, for example, having structures within the loan that give them access to preferential lending rates if they're able to meet certain ESG performance metrics, and with disclosures, obviously, to back that up.

So I suppose that's my point, is that the question around the availability of data, you almost have to take your strategy as a starting point, and then answer it with that strategy in mind where the gaps and challenges are.

 

Quantifying DEI data

Fiona Sherwood

And Chloe, what about you. I mean, in terms of DEI data, what are the challenges that you're seeing there?

Chloe Horne

I think the challenge with most social issues is that they're hard to quantify. And with social issues, there's always going to be an element of qualitative data. Because there's a narrative that comes with issues that impact people, right. And you don't want to diminish that sometimes when quantifying it when it can't be quantified.

But saying that I think DEI has been the called, the easy social issues data to collect, because there are some things that can just be numbers, for example, that the number of women on your board or two percentage of your workforce, which are of colour or black, or have a disability. I think the issue comes when you started to ask what good looks like and how you assess the data you've collected.

So, I mean, for date, for gender, it's somewhat easy to calculate this because from country to country, the population split doesn't vary very much. But how do you compare two companies racial diversity levels, if they're based in two very different countries, with two very different populations or with things like class in the UK, you can probably ask if you've received free school meals to understand whether they grew up in a low income household. That isn't the same type of question you'd ask in other countries, and even with things like LGBTQ plus employees, in some countries, gay marriage is outlawed, or people might not be comfortable disclosing that data.

So, it's still very difficult to compare this level of information. But I think that is okay. It just needs more thought. I think it means having different expectations in different regions. And understanding that there are regional nuances. I think, you know, every ESG issue is complicated. And there's no reason why DEI is going to be easier. I think it just means like determining what good looks like in each region and developing that framework.

What frameworks are gathering most pace?

Fiona Sherwood

Yes, absolutely. I mean, talking of frameworks, the PRI DDQ - the DEI DDQ – is one of the most used resources. We it's certainly the standard one, as far as we're concerned. So, could you just tell us a little bit more about that?


Chloe Horne

Yeah, for sure. So, we developed a DDQ a couple of months ago. It's still being finalised. But it's a resource that asset owners to assess their service providers, which include external managers and consultants. And what we're encouraging asset owners to do is look at those service providers own DEI levels, but also how those organisations factor the AI into their investment and stewardship decisions. So, we have questions that asset owners can ask about the workforce diversity level, but also ask questions about like their stewardship policy, and if they factor DEI into their voting decisions.

What we haven't done is provide guidance on how to assess the responses asset owners get from the DDQ. And that's based off of everything we've spoken about so far. I think it would be quite a blunt tool if we said x is good and y is bad. We want asset owners to feel empowered to have conversations about that and make judgments for themselves taking into account out that regional context, I think one thing that we're very mindful of is in this space, there are so many data points and levels of data being collected. And we don't want to add to that noise and overcomplicate things.

And so what we've tried to do is align those questions with existing questionnaires out there. So we've built on ILPA's DDQ, and the Asset Owner Diversity Charter and other organisations to try and ensure there's alignment there where possible.

But yeah, it's very iterative. I think the DEI landscape is always evolving, and we are very open to feedback. So I think we'll be updating this on an ongoing basis. And if anyone listening has feedback on the DDQ thinks anything's missing, or doesn't make sense, with, we're definitely open to feedback and happy to update things.

Many firms are collecting custom data, using DDQs and also consuming market data

Fiona Sherwood

Yes, we've had that digitized as well, so we can do some research amongst our clients, actually. I mean, in that respect, most of our clients do supplement DDQ, standard DDQ data with custom qualitative data as well that they'll collect in on a one to one basis. Adam, do you think that that is the right approach? Obviously, there's market data providers as well in the picture. So, do you see most firms taking a holistic approach to data? So, they'll do the custom collection? They'll use the DDQs? And they'll also use market data providers?

 

Adam Jacobs 

Yes. So basically, many of our members sit in the middle of the data challenge, if we're going to describe it in those terms, because on the one side, they've got investors asking them for information about what we do. And to your point, yes, that due diligence process for the fund managers tend to be based around industry norms and industry templates. But most investors do also like to squeeze in a couple of their own questions at the end, just to prove they've really thought about it and come up with something bespoke.

So, for our members, that tends to be that challenge of working out how much you can use your common stock of answers and where you might need to supplement the DDQs to answer the questions that particular investor cares about.

And then on the other side, members obviously need to ingest data themselves to be able to back up any ESG claims they might be making, or to be able to integrate ESG considerations into the investment process. And there, I'd say there is definitely a very heavy reliance on external data providers. So, you will often hear talk of the role of MSCI and Sustainalytics, there's a handful of firms that do have an important standing in the market.

But the thing that I'd say lots of firms are very conscious of is that the way in which those ratings providers, produce their metrics around ESG don't necessarily directly compare. They all use slightly different metrics and approaches and they all come up with slightly different answers as a result.

So, part of the process for most of our members when it comes to deciding what external datasets they're going to rely on, is really understanding, as far as you can given it is somewhat commercially sensitive, what individual providers are offering you in terms of data set and how they've crafted that data set. So, is it based more on human analysis? Is it more systematic based on company disclosures? Is it more based on internet information that they can scrape and an aggregate so can vary.

And then alongside that, there is the push by our industry to maximise the extent of corporate disclosures. So, there might be through the debate around regulation and what rules exist for corporates when it comes to, for example, climate disclosures are high on the list, or engagement with private companies in which you have an interest to try and maximise what they're reporting on to make sure that your dataset isn't 100% reliant on these ratings providers, that you can build your own analysis as well.

Are businesses walking the walk as well as talking the talk?

Fiona Sherwood

Data is just one part, isn't it? I guess. It's not just about data. It's how do you walk the walk? As well, as you're saying one thing, but it's all about embedding the Responsible Investment ethos, isn't it, throughout the business? What do you think about that, Chloe, how are businesses making sure they're not just being performative?


Chloe Horne

Yeah, that's a really good question. And I think one of the challenges is metrics can sometimes mask that bigger picture. And I think this is when it's really important to talk about the E and the I in DEI because think diversity data is very different to inclusion data and inclusion, and equity is the end goal here right?

There's no point to have seeing lots of women in your organisation if they're harassed or being passed over when it comes to development opportunities or being let go of for reasons that their male peers may not be let go for.

And so, when you're looking at things like the percentage of women in your workforce that doesn't tell you that much, right, you need to start thinking about the whole employee lifecycle, which means thinking about recruitment, retention, development and promotion, and the breakdown at each stage.

So, for example, what's the turnover rate for trans employees compared to their CIS counterparts? Or what's the promotion rate for employees with disabilities compared to their peers without disabilities?

And I think also, what's interesting here is to think about the roles and the levels within an organisation. Looking at that broader workforce diversity data doesn't tell you that much. Because, I mean, if you're looking at gender, again, you tend to get lots of women in the HR function and less women in investment teams. And so, looking at the organisation and the levels as well, it's really helpful.

I mean, one other thing I'd say here is that policies and practices need to play a part in this in this conversation, things that may not seem linked to DEI, like whistleblowing mechanisms are incredibly important. So that marginalised groups and people who might be negatively impacted by DEI practices have some way of whistleblowing, and you need to find out how much those mechanisms are being used.

And I think one of the things going back to the point about qualitative data, this is needed for DEI as well. You need to get a sense of the culture and how people feel about an organisation and how they're treated. And qualitative data is how you get that. I mean, I've spoken to many consultants who have said they spend a day in the organisation just to get a feel for it and understand if the data that they receive matches the sentiment within the organisation.

So, I think this is a bigger picture. This is a conversation that needs to be had at the broader level. And data needs to catch up with that. And so things like just percentages in workforces, or numbers on boards isn't going to give you the whole picture. So, you really need to think about that inclusion angle, too.

 

Take a qualitative approach to ESG data

Fiona Sherwood

Yes, definitely. And I guess that's true of ESG data, as well Adam, it’s not just DEI that needs that qualitative approach.

Adam Jacobs-Dean

Yes. I was going to pick up on that point around DEI data, because when we were developing our DDQ on DEI, which is something that managers fill out regarding their own practices and share with investors. One of the points that people made to us was, “well, we're a small firm, and our metrics won't tell the whole story, partly because we might have challenges in terms of what data we can collect. Or even if we do, that data is not going to shift in a meaningful way over time, given the number of individuals is relatively small.”

Part of it is being able to therefore articulate what your overall policy is, and what you're actively doing as the firm to try and shift things when it comes to DEI, if it's something that you're motivated to focus on.

Whether that is for example, participation in industry initiatives, or things where you can go and speak to students at schools to try and change the pipeline of candidates coming in, this is all a broader story around what you do. And the same would definitely hold true of your ESG practices.

Because one big challenge in the context of ESG is that you can present data about, for example, your portfolio's alignment to net zero and the degree of carbon intensity about your portfolio, but that's a point in time number. So, what investors also want to know is what is the transition pathway that you're following? What's the transition plan in terms of your overall portfolio? Because that could give quite a different answer. If you're a portfolio that's highly carbon intensive, that’s also very focused on reducing that intensity is quite different to a portfolio that's maybe less intensive when it comes to carbon, but really not doing anything to shift practices.

 

What format is ESG data provided in to investors and institutions?

Fiona Sherwood

And we have just had a question. What format is ESG performance data provided to investors and institutions? I guess that varies, but I will, I will let you answer that. I think, Adam.


Adam Jacobs-Dean

So I suppose one observation I would make is it's very much dependent on what precisely you have sold to the investors, because if you've made explicit claims about what a portfolio can do then it's quite important that you are able to back those up with data. And that is obviously a big emphasis in the regulatory framework. Okay, there's no universal set of approaches to ESG given the variety of investment strategies that we're dealing with, but if you make particular claims, then you should be able to justify them with data that's relevant to what you've actually promised to investors. So, the the short way of answering is: It depends what did you tell people that you were going to do and come up with something credible that allows you to back up whether you did or did not, in fact, achieve what you want you had promised?

 

How prevalent is greenwashing?

Fiona Sherwood

We hear a lot in the media don't worry about greenwashing. Do you see that as an issue in the alternative investment sector?

Adam Jacobs-Dean

Yes, I mean, it's universally a challenge across responsible investment, partly because there is such a significant inflow of capital into sustainable investment oriented strategies. And so, the risk will be there that the less scrupulous participants will try and game that to some degree.

I'd say most firms I speak to are very conscious of greenwashing issues and very much of a mind that they want to stay well away from anything that could be perceived as, as greenwashing.

Interestingly, often, it can be the consequence of regulation that you have to deal with, of working out how you present what you're doing on sustainability issues. I've spoken a couple of times about SFDR. If you have a product that promotes environmental or social characteristics, you have to meet certain enhanced disclosure obligations.

There's a big debate about what it means to promote an environmental or social characteristic? Is screening something out of the portfolio promoting it? Or do you have to actually actively build it into the portfolio? And so sometimes it can be challenging to navigate those, which means that greenwashing is a risk, even if you're trying to do things, right, because of the need to disclose more on what you're doing.

 

Lack of consolidation around frameworks

Fiona Sherwood

They are just some of the challenges, aren't they? Another huge challenge is that the sector while both DEI and ESG sectors are highly fragmented, there seems to be a real lack of consolidation around different frameworks, different standards. Are there any groups or standards or frameworks out there gathering pace? From either an allocator, or a manager side, Adam, that you think we should take a closer look at?

Adam Jacobs-Dean

Let's be honest, the one that is most discussed in terms of external frameworks is that is the PRI. So a shout out to PRI, because it's the one that people are most likely to spend time considering, particularly if they've received a DDQ that says, “Are you a member of PRI? And if not, why not?” So it's something that that firms will tend to look at.

The challenge there to my earlier point is that if your strategy does not necessarily conform to the long-only equities model of how to do responsible investment, some of the elements of PRI can be more challenging to navigate. Stewardship, for example, in the context of a situation where you don't directly own company shares and have a voting programme, then you have to look at that in a slightly more sophisticated way, or take a slightly different approach to it.

So, for some firms, those will be the kinds of questions of fit that they will need to ask themselves. And then other than PRI, I'd say TCFD tends to be an important reference point across the board, because regulators are using it now for disclosure rules, it is being referenced in the UK, it's being referenced in the US by the SEC and it's obviously referenced as well, by the PRI.

So, as an alternative, model, TCFD is something that I hear a fair amount of discussion of.
The reality is that regulation does drown out all discussion of the more voluntary or optional codes that you could be looking at. And because if you're subject to SFDR, you've just got to do SFDR. You've got to do it right.

So for a lot of firms at the moment, that is where the focus really is, making sure they really understood what's required of them and implemented it properly.


DEI frameworks

Fiona Sherwood

I think a real belt and braces approach. And Chloe what about you? Are there any groups or standards or frameworks that really stand out for you?

Chloe Horne

Yeah, I think there's so many in this space. But one thing I always point to is the Asset Owner Diversity Charter, which is a set of actions asset owners can take to really improve DEI across the investment industry.

They also have a standardised DEI questionnaire, and they have a charter or a toolkit for signatories to implement that.

The other thing I've touched on, and I think I think we've spoken less about investors looking internally at their own organisations, which is important too. But the CFA DEI code does that. They have a voluntary set of principles for investment organisations, which looks at things like recruitment and investment organisations, disclosure of diversity data, and they have a reporting framework as well, to really help organisations with their metrics.

So, I think that's currently focused on the US and Canada. But there are plans to expand that to other regions. I think that's a good one. Because I mean, there are so many studies as well, to show that investment organisations with better diversity, make better investment decisions, less risky, have better ESG performance. So, I think it's good that there's attention to how investors are looking inwards as well.

 

Examples of great work in the industry

Fiona Sherwood

Yes, and that sort of self-certification, putting the responsibility back seems to be kind of the approach outside of regulatory requirements, which is good. So, I don't want to put you on the spot, with any names, but Chloe, are there any investment firms, any managers, any allocators that you're seeing doing fantastic work? Not that I want you to name the names, but could you give us some examples of great work that's happening?

Chloe Horne

I won't name names. But I think one thing that's really encouraging to see is systems level stewardship to address systemic DEI risks. So, we've seen lots of work. And I can name this actually, because it's a group of investors, there's an engagement called the platform living wage financials, which engages with companies on the adoption of living wage. And if you think about the intersection of ESG issues, and that with things like living wage, its women and employees of colour, who are more likely to be impacted by low pay, and so engaging on these topics are really impactful.

And also thinking about those broader issues like mass incarceration, or access to housing, or justice or education, is really great to see.

And I think, Adam, you touched on it previously. But sometimes when you talk to companies, you tend to, when they say,” Oh, we don't have very good levels of gender diversity, or diversity and other things", but their response is that there aren't enough people in the environment that have the skills to work in the organisation. And so focusing on things like access to education really helps to address that point. On data, specifically, one thing that has been really cool to see is investors using things like the Genie coefficient to measure global inequity, rather than those more like company level data points. And I think it'll be interesting to understand how that moves and how your input as an investor can help to improve that.

Exemplars in the ESG space

Fiona Sherwood

Adam, what about you? Can you think of any examples of kind of really great, either data collection, or really great work happening?

Adam Horne

The, you know, for many of our members, the existence of industry level collaborative projects is really important.

So things like the Carbon Disclosure Project where you're maximising this the potential to get useful information from companies, or Climate Action 100. And often, these are particularly important in a stewardship context, if your way of investing doesn't confer voting rights, because it's a way for you to push outcomes that you want without necessarily having to vote at the AGM process, which you might not be able to do, depending on what you're investing in, or the how you're investing.

And then when it comes to sort of individual, firm level, the thing I would say is that your ability to respond well to the data challenge really is reflection of the way in which you're set up and your own governance around ESG issues. Because on the one hand, you could be very responsive and say, “Oh, we're subject to this new set of rules. And that just requires us to disclose against these metrics. So let’s just go out and buy some data, and hopefully that'll do the job.”

Or if you turn it around and take a more strategic approach, you could start from the point of view of what does our view on ESG actually look like in practice? What's our governance around that? What are our data needs in practice? And how have we gone about verifying that external data that we might use would meet those needs, and then that becomes essentially the story or the basis on which to deal with either investor questionnaires or regulatory requirements that might come down the line. So the rather than sort of approached data issues responsibly, be more, more strategic in terms of ESG and responsible investment overall.


What does good look like?


Fiona Sherwood

Yes, go back to the beginning and work out your priorities if you like. So, just to go back to the title, which is what does good look like? Chloe, what does good data look like to you?

Chloe Horne

I can give you a really quick response here, which is good data is data that meets your objectives. It's not data for the sake of collecting it. It's about being deliberate and thinking about what you're trying to achieve.

If you're a diversified investor with a really big portfolio, it might be about addressing global inequity.

If you're an asset owner, whose beneficiaries are majority women, it might be about aligning to beneficiary interests and focusing on gender equality within the workplace.

But the main thing is that you need to develop a data collection strategy and map your data to those objectives and make decisions based on the targets that you set. So if you say that you'd like to see 30% diversity on a board, and you don't see that there should be a plan in place. So I think it's about using data as a means to an end and have targets in place.

Fiona Sherwood

Yes, holding yourself to account on progress. Really.

And, Adam, same question to you, what does good data look like to you?

 

Adam Jacobs-Dean

I completely agree with what Chloe said, and on the investment side, I suppose a key test is, is data decision useful? Because obviously, you could buy in reams of corporate data or analysis by ratings agencies and data vendors about the ESG performance of the companies in which you might invest, but is the data of such quality that it will be meaningfully used by your investment teams? I think that's an important test. Not data for the sake of it. But data that does something meaningful in terms of your assessment of ESG considerations.

And I think part of that is understanding what data you already utilise today, if you're looking to maybe do more when it comes to ESG. And improve your capabilities. There's that gap analysis, I suppose, of looking at the data you're currently using, and assessing where its limitations are. And what you could do to resolve those.

 

What is the first step to good ESG and diversity data collection?

Fiona Sherwood

Is that the first step that you would recommend taking, that gap analysis.


Adam Jacobs-Dean

The first phase is governance around making sure the right people are involved when it comes to articulating your Responsible Investment Framework, because it's one of those things where you can't just have one person who on their own in a desk and writes a policy and that's it gets put in a drawer.
And you do need to involve people obviously from across the different functions of the firm, to make sure that you have something that people buy into, and then subsequently can be fully embedded. So that would, for me be the first step in all of this really. Looking at your governance arrangements around responsible investment, deciding whether they're adequate, whether they involve the right people, and then using that as a starting point for deciding what you want to do in terms of, for example, data collection, or participation in external initiatives, whichever aspect of responsible investment in might be.

 

Closing

Fiona Sherwood

Fantastic. So unless there's any more questions, I think we may have finished. Thank you both so much.

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