ESG data as the key differentiator between active and passive strategies
Bloomberg Professional Services
The sustainable investing landscape is quickly evolving. From ESG integration to biodiversity, challenges are aplenty. However, along with these challenges comes an abundance of opportunities.
On the back of the recent Sustainable Finance Forum hosted by Bloomberg in Toronto, Chris Hackel, Head of Sustainable Indices at Bloomberg, offers his perspective on how companies can leverage data to capitalize on sustainable finance initiatives and deliver financial and strategic value.
How can investors leverage data to manage risk and capture sustainable opportunities?
There’s a proliferation of new data sets, including climate factors and biodiversity. We need to leverage this data to offer more options to investors who wish to shift from exclusionary approaches to positive screening.
To that end, benchmark indices provide clear, transparent, standardized approaches to capture the risks and opportunities represented in these data sets or to positively screen for certain themes or characteristics such as transition, climate, and biodiversity.
Integrating climate considerations into sustainable investing has been a challenge due to the absence of credible benchmarks and reliable, comparable climate-related data. Would you agree? Where are we now?
People want a better understanding of the implications of incorporating sustainable considerations in their portfolios or benchmarks, from both a financial and impact point of view. We’ve seen a proliferation of data in the market that allows for the representation of different sustainable approaches within benchmarks or portfolios. But we need to be confident that the data we use in our indices is of the highest quality.
The data developed by Bloomberg—which we’ve increasingly been using in indices—is highly transparent and undoubtedly clear. If someone wants to drill down and really understand what’s behind the numbers, they can find exactly where the number came from. I think that’s an important thing.
As a benchmark index provider, what we’re looking to do is take these many different data sets that are being developed for the market and create a clear rules-based standard process to integrate them so that, as investors, you can ‘kick the tires,’ so to speak. You can say, all right, how does this affect performance? How does this affect risk characteristics? It can be a starting point to think about a sustainable investment approach.
“Ultimately, sustainable investing is about incorporating new data and new information.”
Chris Hackel, Head of Sustainable Indices at Bloomberg
What’s the current appetite like for fixed income?
Fixed income has traditionally been a laggard in sustainable investing. Usually, a theme plays out on the equity side first, and then people start looking at it in fixed income. A lot of that is because fixed income indices are immensely complex; you have many different types of issuing entities, different maturities, etc. at play.
But fixed income is where we’re seeing some of the strongest interest from clients right now, especially with asset owners. There’s already a lot that’s been done on the equity side, and people want to round out the multi-asset perspective. So, fixed income is a big growth area for sustainable investing.
What advice would you give to those attempting to integrate biodiversity, ESG scores, and climate considerations into decision-making?
Climate change, energy transition, and other factors are creating new opportunities and risks for investors. For example, the global shift from fossil fuels to renewable and clean energy sources is creating an opportunity to invest in companies that are providing solutions for the low-carbon economy or effectively managing the transition away from high-emissions products and services.
But ultimately, sustainable investing is about incorporating new data and new information.
If you want to understand better the risk-to-performance implications of integrating these themes, indices are the right starting point. If you’re reading about something and wonder how it may affect performance and equities and fixed income, etc. then indices are a great place to look.
Where does Canada currently stand in terms of climate transition benchmarks, and how has it impacted sustainable investment?
European countries have been the leaders in terms of sustainable investment, while most other countries around the world are in earlier stages. European countries banded together to say, ‘We want to make the economy more resilient, more sustainable long-term and want to address things like climate change through the financial sector,’ and so regulation has been put in place to really drive that forward.
Recently, what we’ve been seeing globally are more regulatory initiatives that are bringing transparency to the objectives of sustainable funds and indices. This transparency should help investors better evaluate these approaches against their own financial and, possibly, non-financial investment objectives. That’s what will drive sustainable investing forward in Canada and elsewhere.