ESG: A mountain to climb

Sgòr Gaoith, in the Cairngorm Mountain range, was the last Munro[1] I climbed.  And, my oh my, it was certainly worth it! I was able to enjoy spectacular views of the sharp, dramatic cliffs that lead down to the breath-taking Loch Einich and the panoramic landscape of the mountain range I’d grown up with, somewhere close to my heart.  However, if I’m honest, it hadn’t been an entirely enjoyable day.  The weather had been inclement, the route there had been challenging (my questionable navigation skills strike again!) and the assent is always hard work.  Regardless, it was all worth it for the enjoyment of that summit! 

I can draw parallels with Environmental, Social and Governance (ESG) challenges; at times it can feel complicated and hard work, but you’re driven by the end goal at the top of the hill – more robust, sustainable, investment portfolios!  At Dalriada, we’ve recently launched our ESG policy, which we believe is in the best interests of the members of the Schemes we represent.  

The real challenge is the next step – the multi-year, multi-decade implementation stage.  Before we’re able to enjoy the benefits of stronger ESG integration, notably through reduced carbon exposures in portfolios, a considerable number of practical hurdles lie ahead. 

The biggest challenge, and this really is an uphill battle, is the availability and quality of ESG data.  I would, respectfully, suggest that across the industry too much time is being spent on governance, beliefs and analysis; not enough effort is expended extracting actual data from investment managers to get a first look at the carbon exposures across portfolios.  As we state in our ESG Policy:

We wish to be ambitious in our aims, but simultaneously recognise the implementation of this policy will be challenging. This is partly because, as we stand today, the marketplace is not well-positioned to deliver the data that trustees need to make the informed decisions that are required.

We expect over the coming months and years to work with investment advisers, investment managers and platform providers to create the right data feeds to allow us to understand the scheme, and by-product of the relevant ESG metrics. Once we have this data, we expect through engagement, and where necessary replacement of providers and products, to create a trajectory that can deliver on our objectives.

Public equity and corporate debt are the areas where the most reliable carbon data is currently available. But, there’s still no guarantee that you’ll be able to get the data you need from your investment managers.  Moreover, carbon measurement is a complex world that is still in need of standardisation.  Other asset classes, particularly more opaque and illiquid investments, offer less, if any, carbon reporting.  Our starting point is to focus on engaging with investment managers and consultants, to obtain data to allow better investment decision making for scheme members.

This is all before you begin to consider the other areas of the ESG universe.  This is a vast topic ranging from biodiversity, to human rights, to corporate structures and beyond.   As such, the appropriate data and metrics for Trustees is still developing and something to keep a close eye on. 

We see data as the biggest challenge, but there are many others lurking in key stages of ESG integration. Including, but not limited to:

• Metrics
• Engagement and Voting
• Complying with a changing regulatory environment
• Controlling costs
• Greenwashing (the practice of pretending to be environmentally responsible)
• Increasingly shorter time horizons for many defined benefit schemes
• Buy-out considerations  

When faced with many challenges, there’s often the preference to wait and see if they’re solved for you.  However, I believe it’s best to face these problems head on with a clear objective to minimise ESG risks in your portfolio.  After all, the sooner we get walking, the sooner we will reach that summit! 

[1] Scottish Mountain with a height of over 3,000ft