"As an asset management company, we should advocate our own vision of what kind of society we want to build and what shape of society we want to achieve."
--Mr.Mitsuhashi, head of ESG investment team at Mitsubishi UFJ Trust and Banking Corporation.
We were privileged to moderate a panel at “Mining ESG Data from the eyes of investor” session at the Tokyo Financial Information Technology Summit (TFITS), which invited fund management team leaders from major institutional investors and a legal leader from a global securities firm. This quotation shows that many institutional investors have a vision of using ESG data to shape a good society. We had three takeaways.
1) What is the demand for data from institutional investors?
Institutional investors want to manipulate generic ESG data to "create their own unique data.” They want the data to have four characteristics.
(i) Clear definition of data: Data that is clearly and commonly defined across the industry. Currently, definitions differ among vendors.
(ii) Publication of raw data: Data published, unfiltered, by companies are strongly needed. Currently, vendors are estimating some of them.
(iii) Breadth of data coverage: The same data is published globally, countrywide, across entire sector
(iv) Depth of data coverage: Data that is more in-depth within a specific theme, such as environmental or social.
Future legislation will gradually address the first three items. However, legislation would not be sufficient to achieve (iv) depth of data coverage, necessary for detailed company screening and analysis for engagement investing that encourages companies to achieve their management goals, increase their value and achieve sustainable growth, based on a deep understanding of the company. It will not be easy to fully meet this need through legislation, and it is highly likely that the industry will continue to rely on data vendors specialising in environmental, social, human resources and other areas.
2) Usage as a new holistic corporate valuation methodology and development of capital markets through it
A quantitative investment expert with a deep knowledge of ESG funds has suggested that ESG initiatives by institutional investors should include not only the traditional viewpoint of "pushing for a sustainable society" but also "the development of capital markets through new holistic corporate assessments". This approach is clearly different from the traditional accounting information-centred approach, in which fair value is based on future profit forecasts of the company and the future cash flow to be earned by shareholders. In other words, this holistic corporate valuation means that the competitiveness and value of a company's soft aspects are evaluated in the context of ESG in a new way. It also aims to contribute to the development of capital markets by evaluating companies based on this new valuation criteria.
3) Difficulties in achieving “Glocalization”: globalisation and local-specific circumstances remain despite the trend towards legalisation
The legal leader of a global security firm with deep knowledge of ESG has pointed out the difficulty of "glocal" in the context of ESG issues. Global financial institutions that have already gone through these processes have the regulatory competence to comply with various regulations and legal systems while accepting both the global and local aspects. For institutional investors without global reach, it will undoubtedly be effective and efficient for them to utilise the knowledge of sell-side institutions and other professional firms that have a global reach and have taken the trouble to make their ESG operations “glocal”.
Every institutional investor must develop and publicly articulate an ESG strategy. Data will be a critical component of that strategy, and firms must clearly articulate the technology and partnership elements of their approach to this evolving subject.