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Asset Managers Are Rising to the ESG Disclosure Challenge

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Asset managers are playing a more prominent role in developing the ESG data sourcing and reporting space, even as regulations make it more difficult for them to honour their own disclosure obligations.

With responsibility for the careful investment of trillions of dollars of capital, managers are becoming proactive in seeking data from corporates and identifying the best data and data sources for their needs, an expert panel of sustainability professionals told the latest A-Team ESG Insight webinar.

Asset managers are also busy exploring the latest disclosure tools to help them and their investee companies comply with increasingly stringent regulations, the webinar, entitled “Sourcing and Managing ESG Disclosure Data to Ensure Compliance” heard.

“We are seeing, on a weekly basis, different RFPs and RFIs come across our desk – and they’re from a variety of players,” Elisabeth Seep, Head of ESG Product Management at Rimes Technologies, told the webinar, held on February 8.

“Actually, I was quite surprised in the last two quarters at the size and breadth of the players that are now looking for data management help when it comes to ESG. Some of the biggest players that you would know of where I thought they probably had it all figured out internally.”

Under Pressure

Asset managers are the custodians of the finance that can help bring about projects that will help solve global problems such as climate change and social inequity. Consequently, they have come under pressure to act responsibly and to ensure the companies and issuers of assets they own also behave in a consistently sustainable way. Many also see the value inherent in building a sustainable approach to investing and had voluntarily put in place reporting workflows before stakeholders began showing an interest.

But knowing how to to “do the right thing” has often been a challenge. Not only has there been a paucity of information needed to make accurate investment decisions, there are also difficulties in knowing which data to actually extract and how to get it.

With asset owners and regulators – as well as consumers – pressing for change, managers have had to step in to fill gaps in the ESG ecosystem.

For example, Phil Davis, Director of ESG at Helios Investment Partners, said the private equity firm recently engaged with its ESG partners to shore up its data gathering operations. It has also been seeking to establish how it can encourage its investee companies to do likewise.

The process hasn’t been plain sailing.

“We’re now starting to collect some of this data from the portfolio companies, but I think the next stage is how we actually support some of those companies,” he told the panel. “I imagine that we won’t get the perfect data back from the portfolio companies and I think it’s just inevitable that will be the case.”

No Rules

The past couple of years has seen an explosion of interest in, and provision of, ESG data. In their quest to ensure they have enough information to satisfy stakeholders’ sustainability demands, many asset managers are probably buying too much or not enough of the data they really need, the panel heard.

But knowing what data to buy is difficult, and being made even more so by an absence of solid regulation to provide guidance. Rules have so far applied to entity-level data, but asset managers concentrate more closely on instrument-level data, said Mark Davies, Partner at UK-based data services firm Element22.

“Bridging that gap between issued instruments back to the issuing legal entity, which is typically the body that’s doing the reporting, is a challenge,” Davies said. “We find that some of those foundations just aren’t yet mature enough and they need further work in order to help firms to do some of this disclosure reporting.”

The fluid state of the regulatory landscape is also making life difficult in terms of how asset managers report.

Regulations are by no means fixed anywhere in the world. The European Union is further along the road to implementing ESG reporting rules, with the partial establishment of its Sustainable Finance Disclosure Regulation (SFDR). But that is still subject to change, with the EU Taxonomy on which it’s built in flux and other parts of the regulation still to be put in place.

With regulatory compliance rendered a moving target, asset managers are unable to devise lasting and effective strategies, said Helios’ Davis.

“A lot of this has been implemented as it’s being continually updated, revised and new technical guidance coming out,” he said. “That’s just proved a little bit challenging for asset managers in terms of how they implement a lot of this.

“So, we have to look at what the industry is doing – what are some of the reporting standards out there that we can draw on, while ensuring obviously, we’re looking very carefully at what the EU is doing?”

Patchwork Quilt

Another key issue is the fragmented nature of regulations around the world.

The US has given mixed signals on the likelihood of implementing ESG regulations, and while Hong Kong and Singapore have been vocal in the need to create rules around reporting, larger jurisdictions like China and Japan are only just beginning to explore the issue.

Clouding the picture further is the inconsistent application of disclosure requirements to different asset classes; some classes, such as real estate, are excluded altogether.

The result is a patchwork quilt of obligations that can play havoc with asset managers that operate in, or hold assets from, different jurisdictions, and those with multi-asset portfolios.

“Many asset managers and asset owners will have to report in many parallel standards to different disclosure issues,” said Element22’s Davies.

Despite the challenges, the panel was optimistic that solutions are in the pipeline and that even regulations will have shaken out into a largely harmonious body of laws within the next few years. Importantly, asset managers are helping to drive that change.

“Asset managers can be leaders in this space,” said Helios’ Davis.

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