Doing ESG – how does it work in practice?

Rahvusvahelist projekti Responsible Investor Digital Festival was an online event lasting from June 15th to 19th 2020. It was filled with in-depth discussions about responsible investing. To save your time, we have summarized some key insights from a discussion about how banks manage their impacts and what has been the most challenging for them, titled “Doing ESG – how does it work in practice”. 

The session had 3 speakers: Louise Aagaard (PKA), Tara-Jane Fraser (Baillie Gifford) and Alexandra Mihailescu Cichon (RepRisk).

The case of PKA, a large pension fund in Denmark 

• In 2000, PKA started out by excluding certain sectors from their investments, like controversial weapons and the tobacco industry; 
• From that they moved to increasing their investment in green energy, like windmill farms. 
• Today, 4,3 billion euros (10%) of their assets are in green investments and they have a target of increasing that to 7,4 billion in the next 10 years.

An important part of PKA´s strategy of social impact investment is active engagement with the businesses that they invest in (so-called active ownership). An example is their involvement with ExxonMobil, a large oil and gas company. In 2017, they started a dialogue with Exxon and tried to help them reduce emissions with the help of other initiatives, like Climate Action 100+. However, once Exxon exited the dialogue in 2019 and lobbied against climate regulations, PKA placed them under their exclusion list, thereby stopping investments.

The PKA representative brings out two main complexities in doing ESG:

1. Lack of quality data (the four aspects of quality data are explained in the next paragraph).
2. Making sure that a portfolio with low emissions actively helps to mitigate climate change. 
   1. For instance, it’s easy to get a low CO2 portfolio if you only invest in consultancies or banks, but that wouldn’t be helpful in meeting the targets of the Paris Agreement.

The importance of quality data

The next two speakers also stressed the importance of active ownership and quality data. 

Specifically, they highlighted four important aspects of quality data:

1. Data needs to be reliable. In a perfect world where data gathering is standardized and everything is transparent, it would be fine to use self-reported data. However, we are not there yet. To avoid false or biased data, it’s better – whenever relevant and possible – to use information gathered by the media, think tanks or NGOs instead of companies themselves.
2. The methodology used to gather data needs to be transparent. If an investor is just presented with the end number without a transparent methodology, it is difficult to compare it with others or understand its significance. For example, the figure for a company’s CO2 emissions can be very different depending on which parts of the supply chain are included in the calculations. The emissions from production can be very different from the emissions from transportation or end users. 
3. Data needs to be timely. Emissions data of an oil and gas company gathered in 1999 has little relevance today.
4. Data needs to be consistent. If different companies use different indicators and metrics without standardization, it is difficult to compare results with each other and make a decision on where to invest.

We have also visualized the aspects on the following diagram.

We are thankful to the Responsible Investor Digital Festival for the possibility of attending the stimulating and practical sessions. If you need any help with your own ESG targets and activities, do get in touch with us at info(at)storiesforimpact.com.