Citi Perspectives Spring 2020

Citi Perspectives  | 59 within that sector. Funds using this approach would not necessarily exclude a security in the oil and gas industry; instead, they would prioritize oil and gas issuers that have a strong track record in renewable energy R&D or other ESG-related criteria, for instance. Some funds also deploy an inclusion approach whereby they seek to include women-, minority- and veteran-owned broker dealers among their trading partners. Regardless of the approach that is taken, when it comes to evaluating a company’s ESG performance, there are no standard rules or reporting guidelines for constructing a quantitative assessment of a company’s ESG metrics, despite general alignment around a set of qualitative ESG factors. In addition, although the industry has seen a surge in ESG data providers, there is no leading data provider. Top funds use a mix of in-house and third-party data sources to conduct comprehensive credit reviews and to assess an issuer’s ESG profile, applying their own individual research and credit evaluation methodologies. As a result, overall ratings for an issuer can vary across providers. As Peter Crane, President of Crane Data, explains “The space still lacks a clear definition, and it’s a tough sell saying a fund is ‘ESG’ if it invests in the same list of multinational banks as every other MMF.” Absence of standards In response to increased demand for ESG options, financial providers and regulators alike have been laying the groundwork for a unified classification system and standardized taxonomy that will further strengthen the industry and respond to investors’ demands for a conclusive methodology to assess ESG components. One such effort is the UN-supported Principles of Responsible Investment (PRI). Launched in 2006, PRI provides a voluntary framework on ESG issues that can ultimately aid investors’ decision-making. More than 2,500 organizations, with approximately $80 trillion in assets under management, are signatories to PRI. 5 The Sustainability Accounting Standards Board (SASB), which was founded in 2011, represents another standardization effort. Its purpose is to establish industry-specific disclosure standards about financially material information across ESG topics. More than 100 corporations, over one-third of which are based outside the U.S., have reported with SASB since late 2017. More recently, regulators have boosted their efforts around disclosure and reporting. The European Union in December outlined a comprehensive set of green-financing rules that will define the regulatory framework for sustainable investments and other financial products. And in the U.S., the SEC is also moving toward mandated standardized reporting and inclusion of ESG disclosures in public company filings. 5 Source: Signatory Relationship Presentation Q42019 (Slide 2: 2, signatories; Slide 7: $89 trillion assets under management): https://www.unpri.org/signatories/quarterly-signatory-update; https://www.unpri.org/