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ESG proponents on the hunt for a common framework

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By Paola Aurisicchio
24 Feb 2020

A lack of data and a broad range of frameworks for identifying environmental, social, and governance (ESG) assets are significant hurdles standing in the way of ESG becoming a more robust asset class unto itself, said speakers at SFVegas 2020 on Sunday, urging advocates to harmonize their definitions and strategies for investing.

ESG policies still lack uniformity despite becoming a priority for many in the market, agreed speakers on two panels on day one of SFVegas. The amount of data that is available is increasing, and investor appetite is a driving force behind a more standardized set of criteria. The number of frameworks currently in use, however, is staggering.

According to Nate Gabig, managing director in KPMG’s structured finance group, 274 frameworks for ESG have been developed globally by different market participants. Most of them share similar features but are still subjective in their definitions.

Along with Gabig, DWS head of credit research Matt Plomin and vice president of structured finance at DBRS Morningstar Stephanie Mah highlighted the most important phases of ESG development, particularly the definitions and criteria developed by the UN Principles for Responsible Investment.

“ESG has an impact on two thirds of institutional investors,” Mah said during the panel.  

The workshops, crowded with investors, issuers, and rating agency officials, underlined the growing interest in ESG among structured finance pros.  An investor during the discussion said he was hopeful that things are developing in the right direction and found it “encouraging that corporations have sustainability reporting, banks have an ESG desk and rating agencies are getting involved. It’s too early, but a standard will solidify.” Speakers also added that ESG is particularly appealing to millennials, a growing cohort of the investor community that is more likely to prioritize values of sustainable finance.

ESG has become “a main focus next to the Libor transition,” said Roelof Slump, managing director at Fitch Rating’s residential mortgage group during the second panel.

Slump showcased the ESG relevance scores for global structured finance rolled out by the rating agency last October. The scoring system is used to grade the relevance and material impact of ESG to credit profile and ratings.

“The biggest challenge,” said S&P Global Ratings director Matt Mitchell, “is to have a data center. As more data becomes available, the opportunity to quantify the risk will increase.”

By Paola Aurisicchio
24 Feb 2020