Sustainable finance has offered many an application for the term ‘what gets measured gets done’. Or rather, if you can’t measure it in a way that is meaningful and consistent, you’ll struggle to get much done.
I talked about the challenges around environmental, social and governance (ESG) data with Wilshire CEO Mark Makepeace. Based in California, consultant and index provider Wilshire advises on more than $1.3tn in assets and manages $97bn in assets. In 2021, it partnered with the Financial Times to develop indices with a focus on ESG. Mr Makepeace is adamant about the need for a variety of views on sustainable assets, despite the existing, often-conflicting, analyses of ESG data.
Q: Are ESG principles the same as ethics?
A: When discussions over ESG started out, it was really all about ethics and ethical investing. ESG is much broader than that today and investors are increasingly looking at impact.
When discussions over ESG started out, it was really all about ethics and ethical investing. ESG is much broader than that today and investors are increasingly looking at impact
Now, with the awful situation in Ukraine, we’ve got a geopolitical risk. Yes, there are ESG issues involved, but there is a geopolitical risk that the whole world is dealing with, not just the financial markets. And there are a number of fallouts from that geopolitical risk.
Today, the ESG agenda is two-fold. There is climate change, with some pretty awful reports from the Intergovernmental Panel on Climate Change. And then you have all the other ESG issues and the move into trying to understand how investors can assess both risks and opportunities, and invest in a way that takes account of these ESG factors.
Q: There is arguably a renewed focus on engagement. Without it, how difficult is it to create an ESG index?
A: The difficulty is building a consensus around ESG issues and how you measure them. And also we have a debate around how, as an investor, can I have an impact? And how do I assess the impact of these issues on me? I’m not sure we’ve got all the answers today, but I do think there’s a lot of discussion going on.
Creating an index that’s meaningful and helps investors — that’s a challenge that we’re certainly starting to spend more and more time on, trying to help major investors and pension funds think about these issues and how they can change their portfolios. An index is just a portfolio of assets.
Q: How do you feel about ESG data initiatives, including from regulators?
A: Having a standard view, if you like, on ESG data makes it easier for all of us as we can talk the same language, but it doesn’t necessarily make it the right view. Having people who are doing unique research, or who are coming at this subject from a different perspective, often challenges some of the accepted opinion, and leads to improvements and change.
At the moment there’s a lack of standards, and I know the EU and other policy-makers are trying to work on some standards — standards are a good thing. But we also need to keep encouraging people to take the debate forward. This is an area where we’re still growing our knowledge and our understanding, and as the environment keeps changing we have to keep adapting our views. I’m a little bit cautious about the idea that somehow a sort of unified common standard set of data will meet investors’ needs going forward.
Q: What about a common sustainability accounting standard that brings existing reporting frameworks together — will this be useful?
A: Anything that’s encouraging better, more consistent disclosure is a good thing; we still have a disclosure problem. But the ESG industry is growing up. And there is a lot more research and data tools to assess the performance of companies separately to what the companies state.
I think you need both, because you actually want to see which companies are pretty accurate in their reporting. It doesn’t mean the others are deliberately hiding things, but some of them don’t have the systems and processes in place to always accurately report.
While it’s more difficult for some of them because of the nature of the business they’re in, having more outside evaluation on performance, as well as disclosure from companies, is a good thing. But you need both — one is not enough.
The interview has been edited for brevity and clarity. A longer version was first published in Sustainable Views, a Financial Times Group platform that tracks ESG policy and regulation, at the end of March.
Silvia Pavoni is the editor of Sustainable Views.
