Institutional Investors Are Flying Blind When It Comes to ESG Data

A lack of standards on environmental, social, and governance (ESG) issues and irregular data submission by investment managers are preventing institutional investors from getting a clear picture of their ESG investments, according to a new report.

Despite having a desire to track ESG metrics in their private portfolios, 72% of allocator professionals are currently not doing so, according to a survey conducted by software and data firm Backstop Solutions Group.

“The top reason they cited was the lack of a universal standard for measuring and reporting on ESG,” Maryling Yu, chief marketing officer of Backstop Solutions Group, said in a statement. “Allocators and private portfolio managers alike are wrestling with how to capture ESG metrics.”

When asked why they weren’t measuring ESG factors, nearly 50% cited the lack of any universal standards to measure and report, while over one-third of respondents said it was too hard to find the relevant data. At the same time 45% said ESG is not a priority. “It’s simply not included or requested with the performance report prepared by our organization’s financial adviser,” answered one respondent.

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The report also cited an unnamed large institutional investor that said, in addition to a lack of universal standards, ESG investing is being held back by multiple factors, such as no definition of “responsible,” or the fact that ESG falls down the priority list for short-staffed, under-resourced managers. However, the firm said it is not waiting for universal standards, noting it is not trying to track all ESG factors, just the ones that are important to it and its clients.

Recognizing the dearth of consistent ESG metrics, the US Securities and Exchange Commission (SEC)’s Investor Advisory Committee approved recommendations last year urging the regulator to update reporting requirements to include material, decision-useful ESG factors. And earlier this year, the SEC announced that it is considering rules that would require “sustainable” fund managers to disclose the criteria and data they use when making investment decisions. The SEC requested public input from investors, registrants, and other market participants on climate change disclosures.

However, the report indicated that investors should not wait for financial regulators to establish rules or for universal standards to emerge, and suggested managers and investors get prepared to act quickly as standards and guidelines evolve.

“Regardless of what formal processes are available, it’s time to get started,” the report said. “Tackle the lowest-hanging fruit. Spark conversations between allocators and managers about shared values and how to move forward. And be ready to change course as standards and guidelines evolve.”