Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
Pressure on better data for climate action
Research Affiliates, the global smart-beta manager and advisory group, has called on institutional investors to pressure companies over their reporting of green-house gas emissions. Forward-looking reporting is proving useless, a new study reveals.
In a webinar for Australian and New Zealand investors and advisers last week (November 18), Vitali Kalesnik, Research Affiliates partner and director of research for Europe, spoke to his paper, ‘Green Data or Greenwashing’, which was reported on earlier this month. The two big findings in that study were that reported green-house gas emissions (GHG), were more accurate than ‘estimated’ GHG and, what it found ‘shocking’ was that forecast GHG by companies had almost zero correlation with reality.
Kalesnik said in the webinar that more than 50 per cent of possible data on GHG was neither reported by companies nor estimated by data providers. The researchers took four data providers from a sample of eight well-known ones for their study. They assume that GHG emissions have a major impact on climate change, as a central piece in the consensus of scientific work on the subject.
Influencing the fund manager’s position to call for big pension funds and other institutional investors to put more pressure on their investee companies, was the finding that reported data was better than third-party estimates.
“We think investors should start actively pushing companies to report,” Kalesnik said. Research Affiliates has about US$230 billion (A$316 billion) under management globally, either directly with its own funds or indirectly through partners, with offices in Sydney and Melbourne.
Kalesnik said that estimated data was 2.4 times less effective than reported study, according the researchers’ calculations. “Estimated data is a very noisy proxy for reported data,” he said. “And forward-looking data doesn’t forecast future emissions levels at all. We found this quite shocking.” With forward-looking data, he said: “There is no evidence that forward-looking information is useful regarding future changes in emissions and suggests a large prevalence of cheap talk.”
Research Affiliates would like to see an international regulatory initiative for mandatory reporting of GHG emissions data. Under such an initiative, it advocates for:
. adoption of a single reporting standard for the current data and ongoing investment projects (for the forward-looking estimates)
. emissions estimate audits to ensure the accuracy of the data, and
. In the interim, investors should provide incentives for companies to report their emissions.
