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Optimising Sustainable Investment Processes – How Asset Managers Can Best Prepare

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By Martijn Groot, vice president, Marketing and Strategy, Alveo.

Investment strategies are increasingly being driven by environmental social and governance (ESG) criteria and considerations, and ESG investment is growing rapidly. Research from Bloomberg found that assets invested according to ESG criteria are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.

ESG investing has clearly entered the mainstream and that means asset managers need to develop ESG strategies that deliver for firms as well as growing investor demand and scrutiny. While such strategies are still in their infancy in a growing market, ESG-related requirements are set to expand as regulations begin to be introduced, and asset managers need to be prepared.

One driver for change is the emerging regulatory push. Alongside the EU’s strategy to drive sustainable finance growth, asset owners and asset managers need to follow the Sustainable Finance Disclosure Regulation (SFDR), which covers ESG disclosure obligations. While the SFDR originally focused on fund classification to prevent investment products being ‘greenwashed’, under the next phase there will be a requirement to disclose the principal adverse impacts (PAIs) of investment decisions on sustainability. This will become effective in June 2023.

Other key ESG regulations include the proposed Corporate Sustainability Reporting Directive (CSRD). This will require larger organisations to disclose details about their sustainable initiatives, while the EU Taxonomy maintains a list of environmentally sustainable economic activities and CSRD requires organisations to disclose activities against it.

While dealing with the ‘push’ of these complex regulatory demands, businesses are also having to manage the ‘pull’ that comes from a new generation of investors, including millennials and Generation Z, who with concerns over climate change growing all the time, are more attuned than their Generation X and Generation Y peers to the environmental impacts businesses have.

To ensure that effective reporting is communicated to customers at the same time as complying with these strict regulations, asset managers and other buy-side firms will need to leverage large volumes of ESG data. Such ESG requirements span the entire investment process: from screening, asset allocation and research, to regulatory and client reporting. The question however remains, how can all the relevant organisations and parties actually gain visibility of the ESG data they require in what is an expanding market and an increasingly diverse ESG data provider landscape?

There are three types of data that are relevant to this discussion. The first is corporate disclosure data that can be brought together from annual reports, investor relations or other meetings and offered in a common format. Ratings form the second type of data, with Morningstar, MSCI, FactSet and other similar companies devising sustainability scores based on information sources and input from experts. This can be problematic, however, as expert opinions often differ due to the number of aspects underlying ESG criteria and the different weights rating firms put on them, while ESG scores can sometimes be devised from planned actions or future goals, as opposed to what organisations have achieved already. The third category of data is sentiment data, which involves gauging perception of a company’s ESG performance from a range of sources including newspaper reports, television and radio broadcasts, social media posts, press releases and employee surveys.

Making sense of the data

With various options on the table, it’s often a difficult challenge for asset managers to select which ESG data sets they need. Records are frequently incomplete as some relevant data is withheld, and data invariably needs to be gathered from a wide array of different sources. A comprehensive approach to ESG data management is required. Asset managers need to be able to effectively source and integrate the data, where needed, to enable it to be delivered to different stakeholders. A portfolio manager will need granular data in order to choose investable assets and potentially sentiment data for short term trades, while a professional in external reporting will require factual data from corporate disclosures.

Therefore, companies need to source data from varying channels, but also document how that information was retrieved. With many organisations outside Europe not reporting certain data, this may include the estimation of missing fields via specific proxies or sectoral benchmarks. Mapping to a common format, interpolating and covering reporting bases and units of measurement to a standard will be useful for data standardisation. To ensure transparency and differentiation between data sources, and also between facts reported by a company, third-party opinions or internal estimates, data lineage will also be needed.

An ESG data management function includes integration with common data sets and reporting systems as well as a business user friendly process to onboard, inspect and complete data sets. Data quality metrics act as a feedback loop to optimise sourcing and improve overall data quality. Data cataloguing and browsing helps clarify to users across the investment process what data is available and the basis for decision making.

Practices that have previously been used in data provisioning for performance measurement, valuation and investment operations can help refine ESG data management requirements. While these requirements can certainly be complex due to varying data sources, business rules and quality metrics, data management solutions are in place to help investors achieve their goals and objectives.

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