Translating the aspirations of the FII into practical solutions

For many years, companies have been giving lip service to implementing ESG concepts to mitigate the impacts of climate change. (AFP)

The Future Investment Initiative conference once again showcased practical solutions to several global problems proposed by policymakers, dreamers and hopeful stakeholders.

A wide range of topics were covered including digital finance, job creation, sustainable food and food security, data, artificial intelligence, supply chain, infrastructure logistics, construction digital economies, investment in green initiatives and the environment, social and governance concepts.

All of the above is based on complete, verifiable and accurate data on which to rely to enable effective decision making. For many years, companies have been giving lip service to implementing ESG concepts to mitigate the impacts of climate change.

The situation has now dramatically changed due to regulatory pressure and stakeholder action groups, not to mention exposure to class actions.

Asset managers now urgently need good comparable data to make the right decisions, but as we’ll see below, there are still a lot of data gaps.

Non-financial reporting is largely a voluntary practice and by making this ESG compliance mandatory, there is a need to provide investors, consumers, regulators and activists with the data and information necessary to advance the company’s development plans.

However, the devil is in the details, as fundamental metrics, such as actual greenhouse gas emissions, are not yet standardized, as is the ability to compare like-for-like data.

No matter what industry sector they represent or analyze, managers, especially asset managers, need good comparable data to make the right investment decision.

While the availability of data on many climate-related issues has improved over the past two years, the same improvements have not been seen on social and environmental issues, especially social ones, with broad interpretations on this. which constitutes the social matrices and human rights in the broad sense. . For example, should companies report more on a range of data such as pay gap issues related to ethnicity?

The need for more transparent and easy-to-understand ESG data can improve not only portfolio investment decision-making, but also management and stakeholder engagement, ensuring diverse but better informed stakeholders can better engage with businesses on specific issues and also adhere to the type of megaprojects. discussed at the FII conference.

Investment managers need to balance the realities of the current investment landscape with long-term sustainability goals, as a broad economic approach is needed

Dr Mohamed Ramady

Wishing for more data is one thing, using it is another, as companies need to ensure that the relevant analytical skills exist within the general ESG compliance industry and policy makers and their advisers to leverage the better use of all data so that it can be useful for management decisions.

Building such an internal skill base for companies and governments is both costly and time consuming, given that the majority of the investment management industry has reduced its own sustainable data collection and the development of internal expertise. to external third parties.

To start from scratch internally, many asset managers will struggle to unpack the details of the data and draw their own ideas. The same is true of governments with bureaucratic operating systems.

In the face of such pressures, companies and governments might be tempted to engage in the divestment of unsustainable assets with growing clamor from some that exclude companies and carbon-intensive sectors, namely oil and gas. gas is an effective means of achieving social goals.

Others argued that divestment would lead to lower returns and result in the loss of a seat at the table that could be used to steer companies toward more sustainable goals. By boycotting entire sectors such as fossil fuels and coal, it could hamper progress and innovation and ignore the long-term needs of society.

The recent panic that businesses and consumers are facing over the supply of coal for electricity and oil shortages in China and Britain will only increase in the future if the pressure on international oil companies to disengage from fossil fuels and coal continues.

China is now seeking emergency coal supplies from Russia, Indonesia and Vietnam as it reviews its coal production strategy under international emissions agreements. Investment managers need to balance the realities of the current investment landscape with longer term sustainability goals, as a holistic economic approach is required. The latest statements from the OPEC Secretary General underscore this message to international oil companies.

Ultimately, before the market has reliable data to assess whether companies are meeting ESG targets, some of that investment will necessarily be in assets that are neither green, sustainable, nor socially responsible. Divestment often does not make sense, except in extreme situations.

To avoid such situations, the need for more comparable, timely and verifiable data is essential to translate the noble aspirations of the FII into practical solutions.

• Dr Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.

Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News


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