Non-financial performance measurement and a lack of international standards have been identified as the biggest hurdle for environmental, social and governance (ESG) investing.
A new study conducted by BNY Mellon found that measurability and comparability of non-financial performance is holding back asset managers embracing ESG within their portfolios.
The paper highlighted how regulators and industry bodies are mobilising themselves to reduce these challenges by rolling out frameworks and proposals to establish common definitions of sustainable investment and to better define reporting practices.
“We believe now is the time for all investors to start planning their sustainable future, and we are witnessing much activity in the development of ESG standards, taxonomies and legislative proposals,” said Daron Pearce, EMEA CEO of asset servicing, BNY Mellon.
As there is a lack of international standards, investors are currently relying on emerging data sources from specialists with proprietary evaluation methodologies, as well as new tools from established data providers, for their ESG investing.
However, inadequate information was identified as one of the biggest challenges for adopting ESG principles, largely because the scope of ESG credentials has changed significantly.
“It [ESG] has moved on from the relatively straightforward approach of avoiding investment in businesses connected to sensitive issues such as gambling and tobacco, to actively seeking responsible investment opportunities that can generate better investment returns and greater social good,” added Pearce.
“This more nuanced approach to sustainable investment requires the development of more complex metrics, benchmarking and monitoring. At BNY Mellon, we are looking into ways of helping clients apply ESG scores to their portfolios and through this determine the correlation between ESG scores and portfolio performance.”