Translating FII’s aspirations into practical solutions
The Future Investment Initiative conference has once again showcased practical solutions for several global issues offered by policymakers, dreamers, and hopeful stakeholders.
A wide range of topics were discussed, which included digital finance, job creation, sustainable food and food security, data, artificial intelligence, supply chain, logistics of infrastructure, construction of digital economies, investment in green initiatives, and environment, social, and governance concepts.
All the above rely on comprehensive, verifiable, and accurate data to build on so as to enable effective decision-making. For many years, companies offered lip service when it came to the implementation of ESG concepts to mitigate the impacts of climate change.
The situation has now dramatically changed due to regulatory pressure and stakeholder action groups, let alone exposure to class action lawsuits.
Asset managers are now urgently in need of good, comparable data to make the right decisions, but as discussed below, there are still a lot of data gaps.
Non-financial reporting has largely been a voluntary practice and in making this ESG compliance mandatory it is necessary to provide investors, consumers, regulators, and activists with the data and insight needed to further company development plans.
However, the devil is in the detail as fundamental metrics, such as actual greenhouse gas emissions, are not yet standardized as well as the ability to compare like with like.
Irrespective of what industrial sector they represent or analyze, managers, especially asset managers, need good comparable data to make the right investment decision.
While the availability of data on many climate-related issues has improved over the past two years, the same improvements have not been seen on social and environmental issues, especially social, with wide interpretations on what constitutes social matrices and human rights in a wider sense. For example, should more reporting be done by companies on a range of data such as issues on ethnicity pay gaps?
The need for more transparent and easily understood ESG data can enhance not only portfolio investment decision making, but in terms of stewardship and stakeholder engagement ensuring that diverse but more knowledgeable stakeholders can better engage with companies over specific problems and also buy into the type of megaprojects discussed at the FII conference.
Investment managers need to balance the realities of the current investment landscape with longer-term sustainability goals, as a broad economic approach is necessary
Dr. Mohamed Ramady
Wishing for more data is one thing, using it is another, as companies must make sure that relevant analytical skills exist inside the general ESG compliance industry and policymakers and their advisers to make the best use of all data so that it can be useful for management decisions.
Building such an in-house skill base for companies and governments is both costly and takes time, given that the majority of the investment management industry has reduced their own sustainable data collection and development of in-house expertise to external third parties.
To start from scratch in-house, many asset managers will struggle to unpack the data detail and derive their own insights. The same holds for governments with bureaucratic systems of operations.
Faced with such pressures, companies and governments could be tempted to embark on divestment of non-sustainable assets with a rising clamor by some that excluding carbon-intensive companies and sectors, namely oil and gas, is an effective way to achieve social goals.
Others have argued that divestment will lead to lower returns and result in the loss of a seat at the table that could be used to steer businesses to more sustainable targets. By boycotting whole sectors such as fossil fuel and coal, this could stymie progress and innovation and ignore society’s long-term needs.
The recent panic facing companies and consumers due to power-generated coal supplies and oil shortages in China and Britain will only become more acute in the future if the pressure on international oil companies to divest from fossil fuel and coal continues.
China is now seeking emergency coal supplies from Russia, Indonesia, and Vietnam as it re-examines its coal production strategy under international emission accords. Investment managers need to balance the realities of the current investment landscape with longer-term sustainability goals, as a broad economic approach is necessary. The OPEC secretary-general’s latest statements underscore this message to international oil companies.
In the final analysis, before the market has reliable data on which to assess whether companies are meeting ESG goals, some of that investment will necessarily be in assets that are not green, or sustainable, or socially responsible. Divestment often makes little sense except in extreme situations.
To avoid such predicaments the need for more comparable, timely, and verifiable data is essential to translate the lofty aspirations of the FII into practical solutions.
• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, in Dhahran.