Despite reported headwinds facing ESG considerations in investment management, the topic remains highly relevant for institutional investors, asset managers and large corporations worldwide. According to a recent survey by The Conference Board, of more than 100 large companies a majority of them (63%) say they are increasing their focus on the business case for ESG and how it connects with shareholder value. Pensions & Investments reported earlier this year “ESG and investment decisions converge as new issues emerge” in light of increasing regulation in many jurisdictions, continued vigilance against greenwashing and the need to assess climate risk exposure in portfolio management.
All this begs the following questions: How should ESG data best be incorporated in the investment management process? What are the key challenges facing institutional asset managers around ESG data? Is “ESG” data the long-term solution or do we need increased granularity for sustainability as a whole?
Enter Cutter Associates – a US based investment management research and consulting organization who presented findings of a recent survey of asset manager entitled “Firmwide ESG Capabilities” which included ESG data related challenges at a recent NY FinTech week event (co-sponsored by sustainability data reporting platform Physis Investment).
The Cutter study identified the following challenges and trends related to ESG data:
– Integration of ESG data throughout the organization is the biggest challenge, followed by navigating ESG data providers and sourcing data.
– Remaining compliant with changing regulatory requirements around sustainability, emerging standards and frameworks is another key issue – as they are not standardized, for example EU vs. US.
– Looking ahead – requirements for sustainable investing data are broad, deep, varied and evolving – from many perspectives including enterprise level (ESG strategy), front office (research, portfolio management, engagement), GRC (governance, risk and compliance), constructing a way to align IT with business goals while managing risks and meeting regulatory requirements, operations (performance and attribution) and client facing issues (due diligence and client reporting).
– Many firms surveyed are focused on creating shared perspectives across their organizations, establishing ESG domain expertise and training staff in this emerging discipline.
– Many firms are developing plans for ESG technology improvements to modernize data architecture and reporting. Firms are also exploring ways to incorporate AI applications to improve reporting.
Angela Centeno – Director, Cutter Research observed “Asset managers don’t have all their ESG data requirements figured out – so they are storing and maintaining data sets they might not ultimately need, since they’re still determining their requirements.”
Laura Jesson – Senior Research Analyst from Cutter Research added “Firms are sorting through available data and its inherent issues of sourcing and integrating data and remaining compliant with regulatory requirements.”
A though provoking panel discussion followed the research presentation moderated by Physis Investment Founder / CEO Stefania Di Bartolomeo featuring two senior investment management practitioners working with sustainability data.
The first executive started his remarks by noting that they use multiple data providers, focusing on climate, environment, and social issues. They use the data to inform both investment management decisions and compliance in multiple jurisdictions as a global firm. He said the landscape has shifted from a focus on sustainability objective to creating “positioned impact” coupled with financial objectives to demonstrate that they are helping clients achieve their investment objectives.
He continued to note that they are seeking to use future-focused data to help inform investment decisions in some non-standardized ways. This has resulted in the creation of customized portfolios focused on investor preferences, like climate and gender issues for example.
The firm is working to strike a balance between using too many data points and focusing on those that are material to investor sector performance. Keeping up with sustainability regulations has become increasingly difficult – as they work to understand “regulatory intent” noting that the EU has a more focused view of their desired regulatory outcomes.
An additional observation was made that investors need context – are they trying to drive some specific impact? It comes down to helping investors determine what they want to accomplish, and how ESG data will inform the trajectory of the portfolio to meet desired investment objectives.
The second practitioner opened his remarks by saying there is a tremendous amount of complexity in terms of providing the right information to analysts in his organization. For ESG data integration they’ve considered using one data provider versus many, as well as creating their own ESG database. “The struggle is real, as none of the existing data providers gave us an adequate solution. Data integration became a challenge, as no front-to-back solution existed.”
They started building their own ESG database in house, then four years ago they went outside for data aggregation with Bloomberg. They created an ESG data hub in the cloud as the solution, partially in response to the changing vendor landscape and changing regulatory reporting requirements.
He then observed that there were two major types of data quality issues – first addressing ESG data governance issues like data quality (accurate, complete, reliable) accessibility and then second establishing definitions of data hierarch in terms of how ESG data is being evaluated. They’ve hired dedicated data governance and data quality experts to address these issues.
Stefania Di Bartolomeo noted that Physis Investment is committed to using their innovative technology to provide sustainability data beyond traditional ESG metrics, enabling positive change in the world, working in tandem with investment performance. She gave the example of their new ImpactChat.AI platform that leverages advanced generative AI to allow users to access millions of data points, to effortlessly analyze any security and empower sustainable investment decisions much faster.
Addressing all these ESG data related issues will clearly require concerted effort from all stakeholders involved – including companies, investors, data providers, and various regulatory agencies worldwide. Sustainability data quality and consistency, improved integration with traditional financial analysis, transparency and developing standardized reporting guidelines will be crucial steps towards the more effective use of ESG data in investment management. In the end, it will help all the parties involved to do better (financially) while doing good (for the environment, society and improving corporate governance).
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