Schroders explores the landscape of impact reporting and ESG integration at the launch of the UN Global Compact’s UK-Norway Sustainable Finance Action Platform

Schroders’ Global Head of Product, Solutions & Quant, Carolina Minio Paluello, discussed the importance of ESG data and integration at the United Nations (UN) Global Compact Network’s event to launch the UK-Norway Sustainable Finance Action Platform.

The UK-Norway Sustainable Finance Action Platform is a newly-formed initiative between the British Embassy in Oslo and the local networks of the UN Global Compact in the UK and Norway. The platform, based on the five Action Tracks in the COP26 Finance Campaign objectives, aims to bring green finance to the core of the financial sectors in Norway and the UK through closer collaboration and collective leadership to tackle climate change.

The measurement and reporting of ESG data is a key deliverable that will drive real progress within sustainable finance. In this panel discussion, Carolina discussed the evolution of ESG data and how it is integrated into the investment process:

Carolina Minio Paluello, Global Head of Product, Solutions & Quant said:

“Traditionally, measuring investment performance has been two dimensional, focused on risk and return. However, we believe the future of assessing investment performance is going to be three dimensional, with the emphasis being on risk, return and impact.

“This is the concept of impact-adjusted returns, which is the forward-looking measure of cost to society. This social cost is becoming a financial one, and it’s therefore within our fiduciary duty, as a global active asset manager, to understand the risks of transitioning to a more sustainable investment framework versus the risk of not.

“This is why active ownership is so critical, because this is where the dialogue, engagement and the voting happens. It is through this process that we can gather more insights and information about a company and what the risks and impact of investing in that company actually are.

 “Data and reporting is also an essential step in this process because it allows us to quantify this impact-adjusted performance for our clients, and demonstrate that their portfolios are aligned to ESG principles. Although data on ESG is improving, we cannot wait for a standardised sustainability framework to be created.  

“We believe that data is what gives our decisions as an active manager an information edge. This is why we have developed our own sustainable proprietary suite of tools, called ImpactIQ, to measure the impact that companies have on society and the environment. For example, SustainEx is an analysis tool developed by Schroders which leverages our breadth of academic research to analyse the societal costs and benefits of various corporate activities; as such, the carbon footprint of a company is a cost to society, but the tax it pays is a benefit.

“This is the additional information that we need as investors to make these informed decisions based on a holistic view of the companies that we’re investing in terms of their risk, performance and impact.

“We spend a lot of time collecting and creating our own data to supplement what is publicly available, and for us as active managers, the next step, and the way that we continue to develop and improve our data is by actually applying it and integrating it into our investment process. We have now achieved integration of ESG factors across all of the investments that the firm manages, fulfilling our intention which we initially announced in November 2019.

“However, where data is particularly scarce is in regards to the forward-looking impact dimension. This is the next phases for us. We want to create impact measures that will allow us to understand the real impact that our investments have.”