President and CEO, CFA Institute
To be able to move towards a sustainable future, investment managers need to focus on three key components: data, standards and skills.
With so many investment managers around the world looking to deploy capital, it is their role to efficiently allocate that capital into the projects that provide the greatest return for investors, taking into consideration the various risks involved. Climate action ranks as one such risk, one that is increasingly growing in both significance and materiality. Investment managers must not ignore it.
Assessing risks with data
As we’ve seen at the recent COP26 summit in Glasgow, the global momentum towards addressing the climate crisis seems stronger than it has ever been. Regulators are forcing action, the private sector is displaying the will to play a role and perhaps most importantly for financial services, the end investors are demanding action.
However, the financial infrastructure must exist to allow asset managers to allocate capital effectively. This requires clear, comparable, quality data in order to properly assess the risk that environmental factors present alongside social and governance issues, however, this data remains vague. The work of TCFD (Taskforce on Climate-related Financial Disclosures), IFRS (International Financial Reporting Standards) and SASB (Sustainable Accounting Standards Board) to enable this data to become available across the board and the newly-launched International Sustainability Standards Board (ISSB) is certainly a step in the right direction.
Investment professionals need practical skills to understand corporate ESG disclosures, effectively evaluate them and communicate them to their clients.
The need for standards
In addition to data, we see two other gaps in the market. Investment products often get touted as ‘green’ investments without a clear statement of objectives, a description of the investment process or an outline of stewardship activities. We aim to eliminate this ‘greenwashing’ with our recently-released Global ESG Disclosure Standards for Investment Products. They stand as the first voluntary standards designed to enable investors, consultants, advisors and distributors to better understand, compare and evaluate ESG investment products.
The importance of practical skills
In addition to standards, investment professionals need practical skills to understand corporate ESG disclosures, effectively evaluate them and communicate them to their clients. Our research has shown that while seven out of every 10 investment professionals now use ESG data, only 11% are confident that they are equipped to understand it. What is needed is a critical mass of investment professionals fluent in the language of ESG Investing and who are able not only able to understand disclosures, but also to ask the right questions to corporate issuers and correctly advise investors.With these three key aspects coming together, alongside commitments from both business leaders and governments, we can incentivise, enable and scale the role that finance can play in the transition to a more sustainable world.