we need more forward looking ESG data
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March 7, 2023
min read

we need more forward looking ESG data

Ratings and other data points are not forward looking. Investors are missing a critical piece to the puzzle.

The forward story is often left out of corporate climate disclosure. Given the link between climate risk and long-term value, it may be useful to evaluate a company's performance and prospects in light of its current and planned climate strategy, particularly in the context of the shift toward a low-carbon economy.

Many factors, such as exposure to regulatory initiatives in key markets, consumer pressure, and investor engagement, will influence how a company approaches climate change. Businesses can either pioneer the sustainability transition, quickly follow the trends, or consciously fall behind. Some businesses are looking to get a head start, show that they care about their stakeholders, and take advantage of climate change as a business opportunity. When it comes to regulations, some people would rather focus on compliance than transformation, so they would rather wait and see how practice evolves before getting involved.

Many financiers are trying to pin down the factors that most affect a company's bottom line and evaluate them sector by sector, all while keeping an eye on how climate issues may have an impact on their investments. Human capital is a major source of economic growth in the technology industry (and many others).

Asset managers note that the detailed explanations found in reports and ESG scores rarely provide clear answers. A number of investors have pointed out that the SEC's expected regulation could help close this knowledge gap.

Understanding the key financial drivers of a company's success, by sector, and the interaction of those financial drivers with ESG issues is crucial to the interaction of strategy and climate risk data.

The investors made it clear that climate is not a single issue (and that ESG is an acronym that is probably misused). Climate data is just one of many variables that investors consider. Credit investors, for instance, may be more concerned with downside risk within the tenor and call structure of the debt, as opposed to fixed-income investors, who are more concerned with capital appreciation. That could limit the range of financial and nonfinancial indicators that are of interest to that particular investor. Investors in fixed income are more likely to speak with finance rather than investor relations to discuss potential immediate threats and other concerns.