Screening is an effective means of ensuring financial products comprise the companies that suit a fund’s mandate. For ESG it’s been a potent tool for eliminating fossil fuel producers, tobacco companies, arms manufacturers and the gamut of businesses that are anathema to investment products built on the philosophy of doing good for humanity and the environment.
The task is not as easy as it may seem, though. The ESG space is constantly changing as perceptions of good and bad practices have evolved; what was a good sustainability investment one year may be on a blacklist the next.
And vice versa: nuclear and gas investments being a recent example. Producers of both forms of energy had been largely screened out of portfolios for many years; nuclear because of the threat of meltdown and gas due to its carbon emissions profile. But last year, as a squeeze on European gas and oil supplies lifted energy prices, the European Commission decided that both industries should be included within the Taxonomy regulation’s permissible list on the grounds that they can provide a lower-carbon stop-gap solution in the transition to net-zero.
As the ESG space evolves, so too must banks and asset managers. They need to be more fleet of foot in maintaining the right balance of investments in their portfolios, considering industries taken off blacklists and equally, those newly placed on them. Doing it themselves, however, can quickly become “a mess” as institutions become overwhelmed by the data and analytical challenges involved, says Bernard Schut, business director at BIQH.
Earlier this year, the Dutch data services company added an ESG screening product to its BIQH Market Data Management platform on which it offers a range of enterprise data solutions for financial institutions. The screening tool is being used by domestic banking giant Rabobank, while other banks and local asset managers are also mulling the new service.
“What we hear from Dutch banks and asset managers is they are saying that 95 per cent of the time they are busy with regulations and compliance so there’s very little time left to change or to innovate,” Schut tells ESG Insight explaining the rationale for launching its ESG services, which also include a tool for institutions to manage their Sustainable Finance Disclosure Regulation (SFDR) obligations. “They must dedicate lots of manual work to this and it’s a lot to do. They tend to panic a little because the data management demands are great.”
Amersfoort-based BIQH acts as a middleman in the ESG data and screening needs of its clients. Its private cloud-based service can facilitate access to more than 120 feeds for clients, including the management of their own data streams. BIQH then puts client and third-party data through a process of normalisation and mastering to ensure it can be ingested and integrate with that data on other systems, whether they be on-prem or also in the cloud.
It’s this need to fully manage data before its deployment that Schut says hampers companies from taking on ESG data management themselves, and in the case of ESG screening, corporate hierarchical structures pose an additional headache. Without deep troves of corporate data – and the technology to processes it – institutions can struggle to peel away the onion layers of holding companies and subsidiaries to identify which companies should be excluded from their portfolios and investment products.
“The challenge for banks is getting all the holding data from their managed portfolios,” he explains. “For instance, BlackRock and so on have all these funds-of-funds that you must dive into at the deepest level of the aggregated holdings. Then that must be mapped to ESG data at the company level, and finally by means of calculations and applying the right weights of the portfolios you will come up with the scores and the results you need to set your screening criteria.
“Because ESG is still quite new, financial institutions don’t have the capabilities yet to do this in a good way.”
BIQH builds its ESG capabilities on data from MSCI, Sustainalytics and many other vendors, to which it maps corporate financial and other data to establish sustainability benchmarks. These provide the gauges against which the company will make screening assessments. For instance, for one prominent bank BIQH has set a 5 per cent exposure limit to specific industries, assets and countries that the client wishes to screen out.
When data availability is too poor to make a detailed assessment, BIQH will engage with the client and vendor to gain more information to help better-inform investment decisions. BIQH doesn’t use estimated data to make these judgements.
“Our role is more to be a carrier of the data and to really take a dive into the data quality, to make the data comparable” says Schut.
The data quality issue is one that BIQH takes very seriously, adds Schut, observing that this is the key challenge mitigating against institutions doing this work themselves.
“The biggest problem for customers right now is to make the data consistent amongst each other,” he says. “That requires lots of work, which we can do.”
The ESG screening service adds to BIQH’s SFDR data tool, which was introduced soon after the regulation came into force two years ago. On that. Clients can prepare their Principle Adverse Impact (PAI) disclosures. The Dutch company has no plans just yet to introduce more ESG services, but it is regularly adding new data feeds and metrics including climate-related physical risk data.
Like many data managers, BIQH expects quality to improve with the first reports next year under the Corporate Sustainability Reporting Directive, when around 50,000 companies will be required to disclose their ESG performances. The flood of data that’s expected to stimulate is hoped to help fill many holes in the sustainability data record.
Schut remains to be convinced of the immediate benefits of the regulation, however, and questions if it will be workable.
“CSRD a big question for us,” he says. “Undoubtedly it will help data quality, but will the smaller companies be able to report under CSRD? It will mean a lot of work for them.”
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