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Success in ESG investing is equally about ‘why’ you measure as ‘what’ you measure

The South African logo The South African 2021-06-28 Old Mutual
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According to Fawaz Fakier, Fund Manager of the ESG Equity Fund, fund managers who outperform their peers in the future will be those who can harness the power of this data today. 

“As awareness grows for the business case around the transition to sustainability, harnessing these proprietary ESG data sets will become increasingly important from a returns-seeking perspective.”

While the volume and granularity of ESG data have grown in tandem with the popularity of sustainable investing, this can also easily muddy the waters, bringing a lot of ESG information to the surface. 

“Obviously, the investment industry is all about information and how to leverage this data to gain better insight. Some of this is binary in nature, but you might also have some data points around operational efficiencies such as the kilolitres of water used per unit of revenue, or their carbon footprint, for example,” Fakier says.

However, not all ESG data is the same. “We’re seeing ESG standards of reporting being published by exchanges around the world and an increasing number of listed companies auditing and assuring their own data.”

Fakier is of the view that differences in what ESG rating agencies measure and how they rank and their performance can also add to the noise. It’s for this reason that Old Mutual decided in 2017 to start developing its own data sets to gain specific insights that match the asset managers view on ESG metrics. 

“Not all ESG data providers are telling you the same thing, and the methodology they use is often not consistent. Often the methodology used, data collected, and weighting they use also varies. As a consequence, you get a lack of correlation between the providers,” he says.

Following a protracted and thorough assessment of the different suppliers, Old Mutual has partnered with MSCI’s ESG Ratings service as its primary data provider. Old Mutual’s proprietary database recompiles this information into a way that suits its sustainable investing thesis.

“Responsible investing 2.0 is about innovation that allows us to bring products to the market that capture the opportunity set of the transition to a low-carbon, resource-efficient and socially inclusive mindset,” Fakier adds.

“I don’t think that blindly following an ESG strategy automatically equates into better returns. You have to have a deep understanding of what that data is telling you. And that is the advantage that our proprietary data sets offer,” concludes Fakier.

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