More Data, More Score Divergence

July 28, 2021

…in ESG ratings, anyway

Dream White Paper - Impact Delta co-authored a whitepaper with Dream, a leading Canadian real estate investor, regarding its recently launched impact funds. We had the privilege of assisting Dream in its effort to establish and maintain a ground-breaking Impact Management System. This paper provides context on Dream and an overview of the impact management approach. The approach has been well received by equity analysts - “Its impact status should broaden the Trust's appeal beyond the typical contingent of REIT investors. We believe the Trust will have a moat as it is difficult to replicate its "impact status – TD Securities (Initiated coverage Apr. ’21)

Quality over Quantity of ESG data: A recently released report from Harvard Business School looked at the correlation between the quantity of ESG data provided, and the associated scores from sustainability rating agencies. Counterintuitively, the more data a company provided, the more the ratings agencies’ scores diverged. This reflects most rating agencies focusing on process (e.g., reporting policies) over company outputs and outcomes.

Politicization of ESG at the SEC: US political parties currently agree on almost nothing, and ESG is no exception. Hester Pierce (a Republican commissioner of the SEC) delivered a speech this week that cast doubt on how far the SEC can go in mandating 'good' ESG behavior. With preliminary recommendations due in October, the rule-making process is likely to be bumpy, although the current 3-2 Democratic majority on the commission makes it probable ESG regulatory requirements will be overhauled. 

SFDR already taking a bite:  Europe has enacted the first phase of the Sustainable Finance Disclosure Regulation (SFDR), starting in March 2021. According to the Global Sustainable Investment Review, this regulatory tightening of definitions explains the decline in sustainable funds under management from $14 trillion to $12 trillion between 2018 to 2020. By contrast, Canada, the US, Japan and Australia all saw increases of 25% to 48% during the same period. 

The Facts. The Institute for International Finance projects sustainable debt issuance will exceed $1 trillion in 2021, up from roughly $700 billion last year. Green bonds, principally issued by sovereigns, financial institutions and utilities, have been the largest subsegment driving the growth. 

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About Impact Delta

A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

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