Institutional investors using environmental, social and governance factors as a risk tool, as well as a source of investment, find the main objection is a lack of consistent data, according to panelists at the Milken Institute Global Conference, which was held virtually.
During a panel discussion on measuring risk and return across ESG investments, Hiromichi Mizuno, former chief investment officer for Japan's ¥169 trillion ($1.6 trillion) Government Pension Investment Fund, Tokyo, said when he joined the fund five years ago he decided to focus on risks to the sustainability of the long-term portfolio due to a lack of ESG data.
To avoid discussions on whether there was any statistical support for ESG as a booster of returns, Mr. Mizuno focused on minimizing the risks. Five years ago, ESG factors were not a part of money managers' core strategies as it is at many managers today, he said.
"Every time we pushed the boundary further, the common pushback was that there is no data, no statistics, no standardized information and no proof of performance," he said.
Some people who use the terms "greenwashing" or "ESG washing" don't want to incorporate ESG, Mr. Mizuno said.
It's very difficult to push for ESG without the data, he said.
That's where the human element of asset management "should kick in and pick up that challenge," Mr. Mizuno said.
The C$434 billion ($326 billion) Canada Pension Plan Investment Board, Toronto, started incorporating ESG factors into its direct investment analysis 10 years ago, said Deborah K. Orida, senior managing director and global head of real assets at CPP Investments, which invests the CPPIB's assets.
Speaking on the ESG panel, Ms. Orida said CPP started incorporating ESG in its public market investments and now includes alternative investments. While CPP Investments executives started out focusing on ESG-related risks, more recently, they began seeing investment opportunities such as expanding infrastructure investments to satisfy the increased demand for renewables, she said.
One challenging area has been climate change, a pillar of CPP's 2025 strategy, because the science is always evolving, she said. At CPP, climate change involves teams across the firm, not only the ESG team. The total fund team is looking to incorporate climate change into CPP's long-term portfolio design, Ms. Orida said.
Fitch Ratings is integrating ESG into its ratings, said Andrew Steel, managing director, global group head, sustainable finance at Fitch Ratings.
Mr. Steel said internal education, calibration and consistency is key when incorporating ESG factors. At Fitch, the internal education process revealed a number of biases, Mr. Steel said.
For example, some of Fitch's airline analysts wanted to "bash" airlines for their emission of greenhouse gases, but emission of greenhouse gases had no impact on airlines from a credit point of view, Mr. Steel said.
And its focus on ESG factors, including climate change, does not mean that investors are taking no climate risk. Ms. Orida said CPP Investments opted to invest in a toll road in Southeast Asia where the risk of rising sea levels and flooding due to climate change are big issues.
"It does require a very human analysis," she said. CPP Investments executives considered the locations of the toll road, the alternative road and the major urban centers. They also looked at a number of scenarios including that one of the urban centers might move.
After running through the scenarios, an investor still needs to decide whether the investment is likely to provide a good risk-adjusted return or not, Ms. Orida said.
The topic of ESG continued into another panel discussion Tuesday about investing in the next big thing.
Deep Nishar, senior managing partner, Americas at the SoftBank Vision Fund, said managers can satisfy a social good and make money, using Tesla as an example.
Marc Ganzi, president and CEO of Colony Capital and CEO of Digital Colony, said his firms are pushing portfolio companies to become carbon neutral and increase their use of green energy.
"This is the commitment we need to make as CEOs," Mr. Ganzi said.
He said these moves will produce lower returns but that investors want to see the commitment toward helping to solve climate change right now rather than waiting until 2025 or 2030.
