Negative screening, the once go-to environmental, social and governance (ESG) accessory, is falling out of fashion.
Valeria Dinershteyn, Northern Trust Asset Management (NTAM) director sustainable investing client engagement for the EMEA region, said the modern ESG trend favours stewardship over broad-sweeping exclusions.
“Our clients are moving away from large exclusions to smaller exclusionary screens and a focus on guardianship,” Dinershteyn said.
The shift to engagement, however, requires a change of mindset, different data and other tools compared to simply carving alleged ‘sin’ sectors out of portfolios.
And data remains one of the biggest “conundrums”, she said, where the vast quantity of disparate information is often difficult to incorporate into the ESG investment process.
“Integrity of data is the cornerstone of ESG investing,” Dinershteyn said. “But a lot of investors are grappling with how to ensure there is comparable ESG data all through their reporting systems.
“That would help asset owners enormously and it’s a development that I am personally most excited about.”
However, data complexity is likely to step up further as the ESG ambit extends into an expanding menu of real-world problems.
“We’re seeing investors becoming more open to including other environmental inputs in their portfolios beyond just climate data to include factors such as biodiversity loss,” she said.
In fact, Dinershteyn said climate and ‘natural capital’ are now being considered as an intertwined “twin crisis” requiring deeper research to understand risks and opportunities at a company level.
She said NTAM also views water as a stand-alone ESG reporting element, connecting with climate and natural capital into a “triangle” of analytics.
But while the now well-established Taskforce on Climate-related Financial Disclosures (TCFD) has set a global template for reporting on those issues, the framework for other natural world data remains embryonic.
Modelled on the now-disbanded TCFD, the Taskforce on Nature-related Financial Disclosures formed in 2021 to develop a similar common reporting framework.
“It took a few years for TCFD to get absorbed into ESG reporting,” she said. “Hopefully, the nature data reporting can learn from that and follow a shorter learning curve.”
The US-based NTAM boasts about US$1.2 trillion in assets under management globally including factor-based index portfolios run for the NZ Superannuation Fund, ANZ and Westpac/BT.
NTAM also ranks as the fifth-largest in the world for ESG mandates, according to its website.
Dinershteyn, in NZ last week at the Responsible Investment Association of Australasia (RIAA) conference, said ESG is now “business as usual” for fund managers.
“ESG provides an extra source of information about companies and another input into the portfolio construction process – it’s not a product,” she said.