Environmental Finance: What do you anticipate will be the main drivers for change in the ESG investment market over the next year?
Maximilian Horster: I see three key drivers in the ESG market over the next 12 months. Regulatory developments, including self-regulatory developments and investor initiatives; new investment vehicles and ESG investment approaches popping up at a large scale; and new financial market participants entering the ESG market which so far have not been overly affected by ESG. This keeps us busy, as all these trends will require investors to understand data, seek guidance and undertake reporting.
EF: What are the main regulatory and self-regulatory developments investors will need to respond to?
MH: Firstly, the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy and EU driven regulations that seek to create transparency in asset management will be a top priority. A lot of investors turn to our dedicated solutions to quickly adhere to those.
Secondly, biodiversity is a big topic, currently being driven by the French regulators, but also under discussion in the Netherlands and in other regions too. The SDG Impact Rating is one of ISS ESG’s solutions already supporting investors in this area, plus our upcoming dedicated Biodiversity Footprint Solution will fully support incoming regulatory requirements.
Thirdly, the net-zero movement and the commitment of asset managers and asset owners to make sure that their investments will be aligned with the net-zero pledges. Our clients seek respective data and guidance from our dedicated Climate team – which just had its 10th anniversary.
To adhere to these initiatives and regulations you need to have access to data that help you assess your exposures to the different aspects that the regulation covers. However, it doesn’t just stop at data. Especially for real world impact, engagement and voting is crucial, which is why so many investors like to link our ESG data with our respective solutions.
EF: Have you observed any regional developments of note?
MH: Over the past twelve months, the Black Lives Matter movement in the United States has prompted investors to focus further on director ethnicity data. ISS ESG has augmented its director datasets, indices and voting policies as a result. Interestingly, an analysis of Russell 3000 companies found higher-than-average ISS EVA quality (this is our analytics solution which measures and values corporate performance) in firms with significant diversity characteristics.
A further development of note is the focus on cyber risk. Our ISS ESG Cyber Risk Score team has highlighted this in the recent S&P 500 case study, Systemic Risks In The Technology Supply Chain.
EF: How has ISS ESG developed its offering to support investors bringing new investment vehicles or approaches to market?
MH: Historically, there was a notion that there wasn’t sufficient ESG data out there. We have now reached a point where the opposite is true. There’s almost too much data and the challenge for investors is to navigate it. For example, just on the topic of climate change, for an individual company we have now over 600 data points you could assess.
In response, we have further invested in our Client Success Team across the globe. They are helping investors turn this data into knowledge that is actionable and customisable to their own investment approaches. This is something our clients appreciate tremendously. We do not leave them alone with large amounts of high-quality data points that can be overwhelming.
Secondly, we’ve integrated our ESG data deeper into our engagement offering and voting solutions. Our solutions do not just stop at building new investment strategies or ESG screening. An investor can make their voice heard through voting in the boardrooms of companies in their portfolios, for example on climate.
EF: What are your thoughts on the collaboration of efforts and knowledge sharing in the ESG investment space?
MH: The collaboration of investors on certain topics, such as Climate Action 100+ and net zero, is very powerful. It is leveraging the power of shareholders. We also partner with the best index providers out there to create innovative ESG index products. If a good ESG data provider combines with a good ESG index provider then you are bringing together best-in-class elements. This can give you better results than just using a one-stop-shop solution.
EF: Are there any new market participants that you expect to be involved in ESG developments?
MH: Banks! They are coming to the table – driven by regulation. Banks are now being asked to run climate stress tests and integrate ESG into their lending decisions. That has really changed the ESG landscape because banks have not previously played a central role in ESG discussions.
As of next year, banks of a certain size in the Eurozone, Australia, Brazil, Canada, Hong Kong, Singapore and the UK, among others, will have to run climate stress tests. All the banks in these regions will need to show that they understand climate risks in their lending practices and have them under control. They’re keeping us on our toes already! As such, I foresee that banks will play a greater part in ESG discussions going forward.