ICE Looks to Bolster ESG Service as Investors Grapple with Lack of Standards

Standards and regulation around environmental, social and governance (ESG) strategies for investing are still evolving, but interest in the area is growing among investors, says Lynn Martin, president for ICE Data Services.

“The EU put in some regulations at the end of last year, but this is an area that is still very much evolving, and firms’ compliance is very much evolving,” Martin says.

ICE recently announced that it is launching a reference data service to help investors assess ESG risks and opportunities in corporations. The subscription will provide access to data points on companies, like reported greenhouse gas emissions and diversity metrics, the company said last week. Bank of America’s Global Research division is ICE’s development partner in the service, and will use the service itself in its global equity and credit analysis. The service will be available to subscribers in the second half of 2020. Martin says that the service will produce more than 500 attributes relating to different aspects of ESG.

“The ESG landscape is evolving rapidly, and investors are increasingly looking for comparable, decision-useful data,” Martin says.

She adds that the service is effectively an extension of ICE’s fixed income terms and conditions business, where ICE Data Services compiles and publishes the information held in the prospectuses put out by bond issuers. Users can now synthesize this data with the ESG information that companies put in their ESG filings and other reports.

Martin says that, ultimately, she would like the service to be used globally, but the initial focus of development will be within the US, as this is where ICE Data Service’s partner, Bank of America, wants to focus.

Big Questions to be Answered

Interest in ESG as an investment strategy is increasing, with firms even creating new roles. Man Group, for instance, named its first chief investment officer for ESG this month. However, the reliability of ESG reporting has come under scrutiny for the lack of regulation surrounding it, and with a lack of common standards and definitions, there is doubt about the simplest question: What exactly is ESG?

Analysts say a lack of standards around exactly what constitutes ESG leaves it ripe for companies to make misleading claims about their environmental or social impact, and regulators are currently grappling with how to hold companies accountable for their claims. In October 2019, the European Council adopted two regulations, which will affect investment managers on disclosure and low carbon benchmarks.

Another key regulation, the Taxonomy Regulation, has been delayed, and is now scheduled to come into force in 2022. The Taxonomy Regulation is intended to create a framework under which activity can be classified as environmentally sustainable or not.

That is the issue that is starting to unfold now as everyone is realizing it’s pretty easy to put three letters on a marketing campaign and off you go.

Ben Phillips, Deloitte

Michael Goldstein, managing partner at Empirical Research said: “If you look at the providers of ESG products and what they call ESG, they are in no sense the same. I don’t think anybody even knows what it is… I tell our clients that we don’t have an investor that is not an ESG investor. But the flows into dedicated ESG funds are trivial. It seems there is a very big gap between the rhetoric and whatever the reality is going to end up being.”

Goldstein was speaking at the first-ever meeting of the Securities and Exchange Commission’s (SEC) asset management advisory committee. With him on a panel was Ben Phillips, a principal and the investment management chief strategist within the Casey Quirk practice at Deloitte.

Asked by commissioners if he thought that the SEC should regulate ESG standards, Phillips responded: “I don’t know if any regulator should be in the role of saying what the ESG standards should be. [But] somebody has to be responsible for puncturing the claims of people who say they are, and aren’t.”

It’s this role that regulators around the world are trying to step into, he said, especially the Europeans.

“The biggest problem for breaking fiduciary trust will be if firms say they are compliant with some sort of ESG standard that they are putting forward and they’re actually not, or the standard doesn’t make sense,” Phillips said. “How greenwashing is addressed and punished is probably the principle regulatory question that the Europeans are grappling with right now.”

Excluding companies that do not comply with ESG standards might actually end up damaging the market, he added. “What if all ESG participants began using negative screens? You would basically shrink the capacity of an already shrunk stock market.”

And the question of how to test whether or not a product or company is or isn’t ESG is unclear at this point, Phillips added. “ESG is not a product, it’s an investment process. How do you audit an investment process for ESG? Is this something the Big Four auditors should do? Is it something other third parties should do? Is there an auditing function that has some public oversight that is a result of this?

“I don’t know. The Europeans don’t know either. That is the issue that is starting to unfold now as everyone is realizing it’s pretty easy to put three letters on a marketing campaign and off you go.”

Additional reporting by Joanna Wright.