Finance Can Save the Planet. It Just Needs Better Data.: Mark Gilbert

There’s an old joke where a tourist asks a local how to get to a scenic landmark. “Well, I wouldn’t start from here,” the resident tells the traveler. Asset managers face a similar challenge when it comes to meeting their climate responsibilities. They’re starting from a suboptimal place. But I’m optimistic that the data they rely on can improve dramatically, providing a more informed environment in which to make investment decisions without straying into greenwashing.

Shareholders have punished the stock prices of European fund management firms in recent months amid concern they’ll be found to have overstated the climate-friendly credibility of their products, Bloomberg News reported this week. The wariness comes after Germany’s DWS Group GmbH came under scrutiny from regulators inquiring into its use of environmental, social and governance marketing.

I sympathize with fund managers, whose role as society’s chief allocators of capital has pushed them to the forefront of the ESG debate. They face an incredibly tricky task when trying to assay the non-financial credentials of the companies they invest in. A landmark study published two years ago showed a sufficiently wide divergence in the ESG ratings applied by six different providers as to render them almost useless. The authors dubbed the problem “Aggregate Confusion.”

“It is very difficult,” Anne Richards, who helps oversee more than $700 billion as chief executive officer of Fidelity International, told an online conference organized by MSCI Inc. earlier this month. “It’s important that we don’t let that mean we do nothing. Our aim and ambition is to be directionally correct rather than precisely wrong.”