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Merrill Lynch and UBS Decry Deficits in Specialist Data

By Miriam Rozen February 7, 2019

UBS and Merrill Lynch both have made marketing moves in recent months that underscore a rise in popularity for socially responsible investing and the eagerness among wirehouse managers to capitalize on that trend.

But executives at the two wirehouses who focus on evaluating socially responsible investment strategies and welcome the growing interest in them also stress that significant deficits persist in the available relevant data.

In June last year, Merrill Lynch told clients and prospects in its marketing material that assets in funds using environmental, social and governance (ESG) factors had multiplied 300 times in less than 10 years. Merrill sourced those calculations with numbers from The Forum on Sustainable and Responsible Investment, a nonprofit advocacy organization, identified by the acronym US-SIF. In October, US-SIF reported that assets in sustainable, responsible and impact investing (SRI) had expanded to $12 trillion, a hike of 38% from 2016.

Anna Snider, head of due diligence for the chief investment office within Merrill Lynch parent Bank of America’s Investment Solutions Group, sees the benefits but also challenges of the spike in enthusiasm for ESG investing.

“With increased interest and demand, it becomes more and more important to provide clients information and tools they’d like to make decisions around ESG solutions. The good and bad story today is that data providers have multiple approaches to measure the ESG profile of a company, and weight factors differently. So, on one hand, you can get multiple points of view by using multiple providers, and diversity of views can be healthy for the market and for innovation. On the other hand, market participants are left without a basis for comparison, which can inhibit adoption of ESG-based analysis,” Snider writes in an email responding to questions for this story.

But Snider expects improvements in available information to evaluate assets on an ESG basis in the future. “I believe ratings providers may move away from holistic ESG ratings and toward producing metrics that investors can compare based on what they think is important or what their goals are, and that’s where standardization can play a role,” she writes.

“How you measure the carbon intensity of a company and ensuring there’s some consensus around that definition, versus the weight that factor has within a particular ratings model would be arguably more helpful to some investors,” she adds.

As signs of progress, Snider cites the United Nation’s Sustainable Development Goals for 2030, and a six-year project completed by the Sustainability Accounting Standard Board (SASB) this past November. The SASB launched 77 industry-specific sustainability accounting standards aimed at providing investors with in-depth information about the impact of a company’s actions on society and the environment.

“But we’re still in early stages,” Snider writes.

At Davos last month, UBS presented a white paper that focused on the UN’s Sustainable Development Goals but did so to identify the “significant risk” posed to them by the lack of standardization in related data. The UBS paper called for, among other changes, the simplifying and standardizing of corporate sustainability data reporting, defining impact investment and measurement coherently and consistently, and naming sustainable investing strategies in a clear, consistent manner so they can be universally understood and adopted.

Andrew Lee, head of sustainable and impact investing for the Americas at UBS Global Wealth Management, has helped create the methodology for a scoring process the wirehouse plans to put on its platform by the end of 2019 that will grade fund managers on their integration of ESG factors.

“Data sources have to get better. Then we will get to a better place,” Lee says.

But he distinguishes between that industry-wide goal, promoted by UBS’ white paper at Davos, and the objectives of UBS’s new planned ESG grading system for fund managers. Lee and his colleagues at UBS are still developing how they will communicate those scores, but they will not be using them as any kind of value judgment, Lee says. Instead, they will simply show how much or how little fund managers integrate ESG considerations in their portfolio picks, he says.

“The ratings are not pejorative,” Lee says. So, they will not highlight if one fund manager's ESG data sources are more standardized than those of another.

But if ESG data and its standardization improves overall, Lee will welcome that outcome. “It will help everybody — fund managers, allocators, and investors,” he says.