Asia-Pacific institutional investors are resorting to creative ways of finding reliable data sources to underpin their sustainability investment strategies, with some creating their own environmental, social, and governance (ESG) scoring systems to circumvent and reduce the data challenges they are facing.
At present there are a couple ways by which investors are dealing with these challenges. One strategy is to use two or three data providers; and for each data provider, the level of trustworthiness of the data is evaluated depending on the region where the provider operates and the quality of the data generated.
Another strategy is for the investor to create their own internal ESG scoring mechanism based on a weighting algorithm that compares the different sets of data that are sourced from the various providers.
“That’s a couple of the strategies used by investors today,” says Nadim Jouhid, head of investment solutions at BNP Paribas Securities Services Asia-Pacific. “But, in general, this means significant investments, making sure that they have the right expertise in-house, whether it is to decide which data source they want to use, or whether it is to create their own data scoring or ESG scoring.”
Investors in Asia-Pacific believe the most significant barriers to further adoption of ESG revolve around data-related challenges. “They are trying to understand what are the best data sources they can use for their ESG investments,” Jouhid shares. “Say, someone is looking at reducing or minimizing their exposure to carbon, then they will do their best to find the data source that allows them to do this.”
But for investors looking to reduce a wider range of ESG exposure, they will likely seek different data sources than those used by those just seeking to reduce their exposure to carbon-related assets. “Data sourcing approaches really depend on investment strategy,” Jouhid points out, as different data sources might allow an investor to obtain a different scoring on exactly the same exposures.
The majority (79%) of investors surveyed, according to a study conducted by BNP Paribas Securities Services, highlight inconsistent data quality across asset classes as one of the top five hindrances, followed by 72% citing challenges around data quality and consistency.
One key difference identified in the region is that a greater portion of investors feel ESG is held back by a lack of conviction that integration will improve long-term performance (65% versus 52% globally).
This barrier is a primary concern for investors in China and Hong Kong. Concern around this is also higher than the global average in Australia (68%) and Singapore (55%). The apprehension regarding performance indicates understanding of the connection between ESG and returns still needs to be deepened across the region.
In Japan, the data issues highlighted above, as well as a lack of advanced analytical tools or skills (73%), take precedence.
More respondents in Asia-Pacific view the cost required to invest in new technologies to be a barrier (48% versus 39% globally). Investors in Hong Kong (67%) are the most likely to highlight cost as being an impediment to ESG adoption.
A higher percentage of Asia-Pacific investors also say the lack of backing from senior leadership is holding back adoption of ESG (33% versus 23% globally). Investors in China and Hong Kong do not cite this as being an issue, while it is highlighted as a barrier by a larger portion of investors in Singapore (45%), Japan (45%) and Australia (39%).
Across the Asia-Pacific region, investors are generally less concerned about the potential for conflicting ESG ratings or indices (54% versus 68% globally) and the risk of greenwashing (46% versus 57% globally).
Inconsistent ratings are still highlighted as an issue by those in Australia (68%), Hong Kong (67%) and China (64%). Investors in Japan, however, drive the overall Asia-Pacific average down, as only 36% say this stops them from adopting ESG. Those in China are the least worried about the risk of greenwashing (27%), followed by Singapore (33%).
