ESG too subjective to benchmark

Sustainability is becoming a new pillar of risk analytics but environmental, social, and governance (ESG) issues are very subjective, according to BNP Paribas Securities Services.

The global custodian said 66 per cent of its trustees surveyed expect the role of ESG control to increase in how they are monitoring the funds.

BNP Paribas Securities Services managing director, David Braga, said typically when risk is thought about with financial products liquidity, credit, and market risk come to mind but now sustainability risk is becoming a new pillar of what trustees are going to have a look at.

"We're talking about a large universe with very complex data to be able to say by particular investments what type of characteristics are looking at within that asset universe and to lay on top of that, the challenge for the trustees of the subjectivity of the topic," he said.]

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"So what they are willing to invest in and hold compared to what they are going to disinvest from and what is the level of acceptability for investments like gambling."

Braga said trustees and clients need to think about how much of a non-ESG investment is a problem for them.

"What's the threshold on gambling? Is it zero? Five per cent? Or ten per cent? Would you accept an asset to a certain level, or do you put an aggregate position across the whole portfolio?" he asked.

Braga noted that it would be unlikely to be a benchmark for ESG investments because of this subjectivity.

"If you look at an industry level we've democratised everything to the individual, so through member choice you can choose whatever you want," he said.

"So it's going to be up to the funds to construct a value proposition of product that is compelling and meets their target."

Braga also noted that in the US Supreme Court found that the fiduciary expectations of trustees in future will need to include climate change and trustees not considering the issue could be in breach of their fiduciary obligation.