Rules Bolster Asset Owners’ Sustainability Efforts
Investors admit that challenges with ESG data remain, but quality is rapidly improving as regulation advances.
Regulation is helping asset owners achieve their sustainable investment goals by driving corporate disclosures and honing ESG data quality, according to research from global index provider FTSE Russell.
Ninety percent of respondents to FTSE Russell’s eighth global asset owner survey said that sustainable investment regulations have been a driver – rather than a barrier – for the delivery of their sustainability-focused investment strategies this year. This is an increase from 75% in 2023.
The survey assesses how sustainable investing is perceived, considered and used by asset owners globally.
“The biggest chunk of raw material that informs investors’ [sustainability-related] investment decisions comes from mandated corporate disclosures,” Tony Campos, FTSE Russell’s Head of Sustainable Investment, Index Investments Group, told ESG Investor.
“Increasing regulation has given investors what they need across environmental and social themes. Most asset owners [we spoke to] said the clarity, consistency and transparency resulting from these regulations has been hugely beneficial.”
Disclosure-focused regulations making a positive impact include the EU’s Sustainable Finance Disclosure Regulation, as well as the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, which has been mandated by several countries, including the UK and New Zealand. The sequencing of European sustainable investment rules means that asset managers and owners have had to disclose ahead of companies reporting under the Corporate Sustainability Reporting Directive from January next year.
Only 11% of respondents said regulation remains a barrier to sustainable investment adoption, down from 29% in 2023.
Fifty-five percent said they are increasing their resources and teams focused on ESG and sustainable investment regulation.
New frontiers
With regulations increasingly in place to bolster corporate and institutional disclosures, fund composition and labelling, the next step is to regulate a wider range of inputs into sustainable investment decisions, said Campos. Regulating ESG ratings would be especially welcome for investors, he noted.
“This will offer more consistency – a through line across the value chain,” Campos said.
This is already in motion in some jurisdictions. In February, the European Parliament and Council adopted ESG ratings rules to improve comparability and reliability between providers by both increasing transparency and restricting potential conflicts of interest.
More recently, the UK government unveiled new plans for the Financial Conduct Authority to develop new rules for ESG ratings in 2025 to heighten transparency in the sector.
“More than half of surveyed asset owners also said that regulating sustainability or climate benchmarks would be helpful for investors,” said Campos.
Gabriel Wilson-Otto, Head of Sustainable Investing Strategy at Fidelity International, said the process changes wrought by regulation were continuing to bed down among market participants seeking to address the challenges of sourcing and reporting sustainability-related information.
“[One of these is disclosing] how data is sourced, harmonised with other data sets, aggregated for specific portfolios, then served to reporting software with narrative content,” he said.
“Data availability is a necessary precondition, but alone will not solve the complexity, cost and implementation challenges of meeting increasingly complex regulatory disclosure requirements.”
Wilson-Otto added that the asymmetric reporting requirements among corporates and financial institutions had also presented challenges for investors’ ability to effectively integrate sustainability factors into investment decisions. Without high-quality and consistent data sets, due diligence costs increase materially, which can prevent capital flows to sustainable projects and increase greenwashing risk, he said.
“The lack of disclosure can also introduce friction when attempting to communicate an issuer’s performance to external stakeholders,” Wilson-Otto added.
Inconsistent and opaque methodologies
More broadly, the FTSE Russell survey noted that concerns surrounding the availability of ESG data, and the use of estimated data, have eased. Fifty percent of asset owner respondents cited this as an issue in 2023, compared to 22% this year.
Meanwhile, 20% of asset owners cited the lack of standardisation in ESG data, scores and ratings as a barrier to sustainable investing, down from 37% last year.
The biggest barriers now relate to resources, methodology and strategies, the survey noted – 39% of asset owners said inconsistent and opaque sustainable investing methodologies are the biggest barrier to increased adoption across all asset classes. Thirty-two percent cited a lack of resources to evaluate sustainable investments.
Sustainability technology provider Clarity AI said “significant variation” in the quantity of data available between companies and jurisdictions made it difficult to compare issuers effectively.
“Additionally, there are no standard reporting formats – while some data is reported in tables or structured formats, many issuers prefer to use infographics, text, or even embedded images in their reports, making data extraction particularly challenging,” a spokesperson said.
Fidelity’s Wilson-Otto said a further challenge for investors was the elusiveness of ESG data for unlisted and private assets.
“Location-based data sets are improving but remain very costly and incomplete,” he added. “This information is critical for granular assessments of physical and transition risks associated with climate change, as well as biodiversity and social risks.”
Not all ESG-related themes have a wide pool of data for asset owners and other investors to utilise. Specific environmental themes – such as ocean health – remain under-reported and measured, according to Sonya Likhtman, Associate Director of Engagement at Federated Hermes.
“The lack of data is especially concerning given emerging risks to ocean ecosystems, such as deep-sea mining,” she noted.
The FTSE Russell survey identified a shift in asset owners’ focus to nature capital and biodiversity-related data, with 21% of respondents revealing they have started incorporating assessments of related risks and impacts into their investment strategies. Fifty-two percent of asset owners who said biodiversity and natural capital are a priority are currently directly investing in or adjusting investment weightings based on these themes.
FTSE Russell’s Campos acknowledged that further improvements were required on several fronts.
“ESG data is the best it’s ever been, and that’s still not good enough,” he said.
“There is always going to be a need for refinement and improvement of ESG data, but concerns about data quality [and availability] are no longer an excuse not to act. It’s now about how asset owners are working with the data they have and how this is driving investment decision-making.”
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