ESG Integration in Europe, the Middle East, and Africa: Markets, Practices, and Data

CFA Institute and the Principles of Responsible Investment (PRI) have released the third in a series of four reports addressing the current state of global environmental, social, and governance (ESG) integration. The newest report ESG Integration in Europe, the Middle East, and Africa: Markets, Practices, and Data explores the current state of ESG integration in Europe, the Middle East and Africa (EMEA).

This report follows the release of the following reports: ESG Integration in the Americas: Markets, Practices, and Data, and Guidance and Case Studies for ESG Integration: Equities and Fixed Income. Our findings covering the Asia-Pacific region will be published in May 2019.

To better understand ESG integration, we surveyed 1,100 financial professionals (predominantly CFA Institute members) around the world and held 23 workshops in 17 countries. We analyzed Bloomberg’s ESG company disclosure scores to better understand the current state of ESG disclosures, analyzed data from PRI’s reporting framework to better understand ESG investing practices in each market, and interviewed leading practitioners in each market to understand the current state of ESG integration.

Our main findings are as follows:

1. There is no one “best way” to handle ESG integration.
2. Governance is the ESG factor most investors are integrating into their process.
3. Although environmental and social factors are gaining acceptance, they are starting from a low base.
4. ESG integration is farther along in the equity world than in the fixed-income arena.
5. Although financial professionals are integrating ESG into the investment process, they rarely adjust their models based on ESG data.
6. The main drivers of ESG integration are risk management and client demand.
7. The main barriers to ESG integration are a limited understanding of ESG issues and a lack of comparable ESG data.
8. ESG data have evolved, but advances in quality and comparability of data are still in progress.
9. A single ESG reporting standard would streamline data collection and produce more quality data.

• Some ESG products may be driven by marketing concerns and may not be true ESG investments.

ESG integration in EMEA was among the most sophisticated we encountered in our global tour. ESG integration in Europe tends to be a few years ahead of other developed markets, which are now looking to Europe for best practices. Investors would be well advised to review the examples of ESG integration discussed in this report from markets such as the Netherlands and the United Kingdom, as well as our Case Studies report, to better understand how analysts and money managers best integrate ESG into the investment process.

In most markets, risk management and client demand are the primary reasons firms integrate ESG analysis into their investment process. In some markets, however, generating alpha (e.g., the Netherlands) and regulation (e.g., South Africa) are the primary reasons investorsincorporate ESG into their investment process.

For our analysis of the Middle East Region, we examined how ESG and Islamic Finance overlap. Our findings will help investors better understand the basic tenants of Islamic Finance as well as the current state of ESG integration in the Middle East.

As we found around the world, investors remain concerned with the quality, accuracy, and comparability of the ESG data they are using in their analyses. Because we are in the early days of ESG integration, little verification and few standards have been available regarding ESG disclosures and data. Thus, investors need to understand whether the data they are using are robust, accurate, and comparable and should adjust their analyses accordingly. In addition, investors and companies need to reach consensus on the reporting of material ESG issues and to promote the standardization of ESG data.

Image Credit: ©Sean Gladwell