Lack of correlated data-points between different providers of ESG data makes a standard ESG framework impracticable.

Andrew Walsh is head of passive and ETF specialist sales for UK and Ireland at UBS Asset Management. He gave a pertinent example of the difficulty of applying a standardized, “one-size-fits-all” definition of ESG: Can you cubby-hole companies in the oil and gas sector along with the ones in the tech sector? No, that’s because the metrics for ESG for the two industries would be vastly different.

However, S&P Global calls for standard ESG framework

In a report titled “Accounting for Climate: The Next Frontier in ESG,” S&P warn that climate risk will begin to affect global growth in the near future. The issue, therefore, needs a calibrated and standardized response from global regulators. Currently, “market-based solutions are plagued by inconsistent standards and terminology.”

“S&P Global believes effective and standardized ESG disclosure is needed to foster this growth. This presents an opportunity for governments and regulators to work with market leaders.”

But is it possible to structure a standardized ESG definition?

ETFs have varying ESG strategies

However, there’s another example: “Everyone has a different definition of ESG,” says Walsh. “MSCI has 37 metrics, whereas Robeco SAM goes even more granular with almost 100 data points.”

Further, giving the example of the difference in methodologies followed by MSCI and Sustainalytics, Walsh warns that investors could misunderstand the exact nature of the ESG exposure they are getting into.

Walsh on ESG ETFs: Buyers beware

Walsh’s suggestion: It’s crucial to look under the bonnet with any ETF, not necessarily only for ESG. Investors should ensure what they are getting is what they were intending to buy.

His point is reinforced by the fact that certain Vanguard ESG index funds were holding gun companies. However, the prospectus had excluded such companies.

Besides, clients may need varying ESG exposure. These could range from “deep green” to “light touch.”

According to Societe Generale

In an extension of Walsh’s viewpoint, Societe Generale recommends fundamental research into the companies that make up the ETF from the ESG viewpoint.

However, there is a second alternative according to Societe Generale: use equity factors alongside ESG factors to construct a meaningful ESG strategy.

Preqin has an answer

However, Preqin has established a methodology and standard benchmark for ESG. It would help managers assess performance against ESG and financial targets.

“We designed the product to provide asset owners with a common, meaningful baseline in their conversations with fund managers about ESG across their private market investments,” said Preqin Chief Product and Marketing Officer Dmitri Sedov.

[Related Story: Globally, ESG Derivatives Are Taking Off    ]