Managers confounded by ESG opacity; compelled by duty

Incomplete and subjective data surrounding environmental, social and governance investing pose the greatest roadblocks to investment managers looking to incorporate ESG principles into their portfolios. The data, compiled by Cerulli Associates, show that of the 200 managers surveyed, between 25% and 28% said that the measurement and veracity of ESG factors pose significant challenges, with another 50% to 60% acknowledging an added level of difficulty.

One example Cerulli offered from speaking with managers was the case of Pacific Gas and Electric. The utility scored high in ESG ratings, but certain climate risks were overlooked, which led to its eventual bankruptcy.

Operationally, the same group of managers said that integrating ESG with their current technology and risk models would generally not pose any problems.

Respondents cited several data sources used for ESG ratings, including internal ratings, with at least 50% using data from four different sources, a necessary step many felt in being able to get a handle on a company's ESG status.

When asked what motivates their decision to apply ESG criteria to their investment processes, the majority of managers cited fiduciary duties and organizational values as their chief drivers. Fewer saw ESG investing as a way to add alpha or promote change in the governments and companies they invest in.