Policy makers in the United States and worldwide need to require more clarity around environmental, social and governance investing, according to Morningstar.

In its "Sharpening the Tools of the ESG Investor" report released on Monday, Morningstar said completeness and consistency regarding ESG investing are still lacking despite the volumes of data now available to investors about this growing corner of the investment universe.

Morningstar, which recently completed the acquisition of ESG data analytics provider Sustainalytics, said there are gaps and inconsistencies in the reporting of ESG data, but there are steps that can be taken to improve the situation. Morningstar noted that it's working with various policy makers to facilitate changes.

Aron Szapiro, director of policy research for Morningstar, said the company is working with the U.S. Department of Labor on existing and proposed barriers to ESG investing. It also recently commented to the SEC on the need for less regulation around fund names and the need for more regulation around disclosures of ESG processes. The firm also works with regulators abroad such as the U.K.'s Financial Conduct Authority and the European Securities and Markets Authority to improve regulations.

“ESG disclosures often cover different time periods than financial disclosures, making it difficult for investors to easily connect these ESG disclosures to financial results,” the Morningstar report said.

The firm would like ESG reporting to move to more computer-readable forms so investors can compare ESG data to financial data, much of which already is in computer-readable form. “Transparency in capital markets is critical,” the report said.

Another situation that needs addressing is that fewer than 30% of stock issuers around the globe disclose ESG factors in a comprehensive and consistent fashion. And private markets are much less likely to provide sufficient ESG data.

“More than 50% of new capital is being raised in the private markets in the U.S., which are exempt from most disclosures," the report said. "These private issuances have minimal ESG disclosures at best. As more investors gain exposure to private firms, it will be increasingly important to consider the role of ESG data for nonpublic companies.”

Morningstar also noted that available disclosures are inconsistent and incomplete to an even greater degree in the fixed-income market than in the equity market. That lack of consistency makes it difficult for investors interested in green bonds to make decisions. The report posits that green bonds are “arguably the most important way investors could achieve positive impact with their investments.” 

“Financial professionals need to be able to meet investors’ needs and financial professionals have a responsibility to manage ESG risk, just as they would manage any other investment risk,” Morningstar said. “Worldwide, policymakers can improve ESG investing by collaborating and working with expert groups to standardize key data, terminology and disclosures.”

Morningstar urges regulators to adopt uniform standards and require issuers to disclose the metrics used when they are material to a company’s business or to their broader stakeholders. In addition, regulators should coordinate with each other so that investors in different jurisdictions have access to comparable ESG metrics.

 

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