Environment Analyst Business Summit 2019: ESG and the dirty data dilemma
Environment Analyst’s 2019 summit featured provocative calls for environmental leadership, critical assessments into the sector’s ability to maintain future relevance and insights into tomorrow’s big value drivers
26 June 2019 / Global, UK
One topic of the day really embodied the EA Business Summit 2019’s clarion call, Capitalising on a climate of uncertainty, the increasing role of investors and ESG in driving the sustainability agenda.
The Summit saw a number of environmental & social governance (ESG) specialists discuss the rising prominence environmental issues such as climate change in the C-suite of the global investment community. It was only a short while ago that ESG could have been perceived as nothing more than a sustainability add-on to a due diligence report, a nice to have. But the times they are a changin’.
Today ESG seems to have swelled to become much more than value optimisation or a way of safeguarding the longevity of an asset’s value. The focus of ESG is now more on business continuity and relevance in today’s world. The consultants that advise on ESG find themselves acting more as strategic advisors and programme managers, than due diligence specialists.
In essence ESG metrics have become a mechanism for investors to try and manage the social upheavals which are threatening the way financial markets have operated for over 100 years. It is their own extinction or rebellion. And many are rebelling.
This year the International Energy Agency’s world investment report found final investment decisions (FIDs) for coal plants tumbled 75% to 22 gigawatts between 2015 and 2018. The world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, announced it would axe $13bn-worth of fossil-fuel equities from its investment portfolio.
At Environment Analyst’s Business Leaders’ Forum debate, one senior figure claimed the oil and gas industry will be "uninvestable" in ten years time.
A raft of agreements and initiatives from the Paris Agreement, to the Principles for Responsible Investment (PRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) has changed the playing field. The world’s largest pension funds are forcing the largest private equity funds to take stock of ESG. Today $86tr-worth of funds are signed up to the PRI which demand ESG is taken into consideration in all decision making. Just for perspective $86tr is over four times the GDP of the US - it’s a lot of leverage.
New York-headquartered ratings agency S&P Global recently started issuing ESG evaluations for companies across a range of market sectors. It’s ESG Risk Atlas unsurprisingly found oil & gas, metals & mining, coal power and chemical industries were exposed to the highest levels of ESG risk.
There was almost universal agreement at the EA Business Summit that the environmental & sustainability consulting community has a huge opportunity to leverage skills and expertise in support of ESG. But there also seemed to be a dichotomy between the climate risk session participants over the size and influence of ESG today.
"In the last 18 months, ESG has grown exponentially as the mid-to-large funds - such as Bridgepoint, Carlisle, KKR - have had to do more," says Anthesis’ director of transactions and corporate services Tim Clare. "But there is a very big spectrum [of preparedness] in this space and thus huge opportunity to get involved."
"Often fund managers consider themselves the C-suite, and they will often parachute you in for ESG talks with the CEO or MD. So the positive is you get straight in front of the decision maker."
However, managing director of Ricardo Energy & Environment Tim Curtis pointed out that the portion of the ESG market which is the most attractive for consultants - the creation of sustainable value - is far from being realised.
"I question if anything different is really happening?" says Curtis. "The sustainable value creation side is still only 5% of total investment - so I don’t think an awful lot is happening differently than we saw 5-10 years ago."
Curtis backed up this statement with some statistics from the Global Sustainable Investment Alliance which compared the sustainable investment approaches taken by global asset managers. While around $17.5tr-worth of assets now integrate ESG into their financial analysis, only $1tr actually engage in sustainably-themed investing.
"While it is great that 80% of investors say ESG is a component in their investment strategy, the actual hard investment is lagging," suggests Curtis.
Environment Analyst’s latest UK EC Market Assessment report to some extent corroborates Curtis’ view. The sustainability strategy & ESG service area accounted for little more than 4% of UK environmental consulting sector revenues, at around £75m in 2017/18. There is no doubt of ESG’s potential to the EC sector - but it has a long way to go yet.
The dirty data fundamental
Given there is no shortage of data or reporting and benchmarking schemes - you would be forgiven for thinking that consultants are falling over themselves to pick up work. But Curtis believes the data underpinning ESG is stymying growth, and shadowing its prominence.
He states: "We can have all the data we like, we can throw it at a wall and see what sticks. But does it actually make a difference to improving ESG?"
Managing Partner at sustainable technology investment firm Earth Capital Jim Totty commended the "deep dive" analytical approaches to quantifying ESG risk. But he cautioned that this approach is only as good as the data available.
"If you are in public markets and have rich data sets, it’s fantastic, you can do enormous things with data. But in the private sector we have to deal with dirty data all the time. And if you put [insert expletive] in you will get [insert expletive] back out."
The panellists had alternate approaches to dealing with this problem. For Totty the solution is to keep the ESG analysis simple, by using 30 repeatable metrics and a scorecard to quantify risk: use the data available to its maximum capability. But Curtis sees an opportunity for the consulting industry to deliver value - and tap into the $2.1tr of climate-related opportunities identified by the Carbon Disclosure Project.
Totty also pointed out the rising prominence of social risk within ESG analysis: "Investors are very interested in the ‘S’ in ESG now. Job creation, modern-day slavery, local economic contributions, gender equality are all now a very important part of the story, and is just as important as the environment."
According to Curtis, "We have huge potential in this industry to help clients overcome greenwashing accusations. We can measure the emissions, we can report what they are, we can plan mitigation, we can get verification and that is before we get really sophisticated further down the line."
So it seems one the most pressing challenges is to clean up the data that is available. This, in time, should unlock a plethora of opportunities for consultants and other advisors to really leverage their knowledge in the ESG space.