A Wall Street gold rush is underway in environmental, social, and governance (ESG) investing, but rating and ranking how companies measure up on these criteria remains a challenge for global capital markets and asset managers.
Singapore’s Senior Minister Tharman Shanmugaratnam said in March that there are immense opportunities for investment in innovation to shape a better and more sustainable world, even as we face a “perfect storm” of higher inflation and slower growth amid the climate crisis.
Part of the solution must be around accelerating the transition to a low-carbon economy through green technologies, even as the world faces an energy crisis resulting from a spike in prices and supply of oil prices in the short-medium term.
The ESG investment boom, which sits at the heart of this green transition in capital markets, is being driven by the sheer weight of money flooding into these types of funds as climate change and sustainability move up the investor agenda.
About $2.7 trillion of assets are now managed in more than 2,900 ESG funds, according to Morningstar, but a lack of standardisation on ESG ratings needs to be addressed if the industry is to grow smoothly.
Singapore Inc. as an ESG investment destination
Academics at MIT Sloan School of Management have said the lack of standardisation on ESG scoring urgently needs to be addressed, dubbing the problem “aggregate confusion” in a recent report.
One survey conducted by Duff & Phelps, A Kroll Business in partnership with the International Valuation Standards Council (IVSC), highlighted the issues caused by the lack of a standardised system for ESG ratings.
According to the findings, businesses currently use “a wide range of ESG frameworks, with no single system having a clear majority. Amongst those surveyed there were 14 different combinations of frameworks used”.
“Some of the most popular current ESG frameworks include Global Reporting Initiative used by 33 percent of respondents, Sustainable Accounting Standards Board at 32 per cent, and Task Force for Climate related Financial Disclosures at 25 per cent,” the report said.
In the fourth quarter of last year alone, there were about $142.5 billion of new inflows into the ESG sector.
As the demand for ESG investments is clearly only growing, Singapore Inc. and its business will need to be well positioned over the coming decade to attract more of this global capital earmarked for sustainable investments by bringing more transparency and accountability to private-sector ESG performance.
Making sense of ESG ratings pool
Technology can help to level the playing field by making it easier and cheaper for small and medium enterprises (SMEs) without a dedicated in-house ESG team to do ESG reporting, as well as access sustainable financial services from global financial institutions.
Our observations have been that self-disclosed ESG data is often available but not always collected (i.e. via IoT, satellites, and drones) and that it needs to be done so on an ongoing rather than historical basis.
At STACS, for example, we do not provide ratings nor host them on our platform – but we do hope to be an upstream ESG data partner/provider to the big ratings agencies such as MSCI and others, delivering more efficient, transparent, and inclusive data for all companies.
This will make it easier for asset managers, banks, and insurers to get reliable ESG data across sectors including transport and logistics, building and construction, food and agriculture, manufacturing, and renewable energy.
Widening ESG projects pool for investment
Despite a growing amount of ESG capital being set aside by banks and large asset managers, there is still a shortage of transparent projects to invest in.
Sustainable investment needs to be powered by data, and the problem of ESG data today is that it is mostly fragmented, and whatever is available is a historical snapshot of self-disclosures with little value to forward-looking risk assessments.
Technology is a key enabler to addressing these gaps and can make data higher quality, more consistent, and accessible.
As an ESG fintech firm, we aim to be an enabler: our role in Project Greenprint led by the Monetary Authority of Singapore (MAS) is to develop the ESG registry, ESGpedia.
As the name suggests, ESGpedia aims to become an encyclopaedia of ongoing ESG data for companies, both from public data and alternative independent sources, adding great value in data digitalisation, structuring, and interoperability.
Fintechs like us must work together with global financial stakeholders and institutions including banks, exchanges, asset managers, and of course governments/regulators.
This will be vital if we are to succeed in standardising ESG ratings and rankings here in Singapore and beyond.
Benjamin Soh is Co-founder & Managing Director at STACS, a Singapore-based FinTech that has partnered with the Monetary Authority of Singapore (MAS) on its ESG registry.
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