Gone are the days where risk-adjusted returns are all investors care about. Now, investments must complement performance with social or environmental characteristics that improve, or are at least not detrimental to, the world in which we live. But how are investors meant to ensure these objectives are met and that they comply with new ESG regulations including the SFDR and TCFD disclosures? The answer is data. And therein lies the problem.
ESG data is notoriously patchy, with company coverage largely cited as the greatest challenge; investors are limited to the finite universe each ESG provider chooses to collect data on. Another concern is the subjectivity of ESG data received; MIT Sloan Sustainability Initiative found a correlation of just 0.61 among prominent ESG data providers. This is largely driven by differing views on materiality, what to measure and underlying calculation methodologies. This subjectivity does not stop with the providers however: all the asset managers we surveyed are also incorporating their own ESG beliefs, either by creating their own metrics through capturing engagement data generated by outreach to their portfolio companies, or both.
These concerns, teamed with increasing regulatory and client demand for reporting on sustainability, have caused asset managers to use multiple data feeds. In a survey Sionic recently conducted in conjunction with Clearwater Analytics, the average number of ESG data subscriptions was found to be five, with one firm stating it had between 20 and 25. This is good news for the market data providers, with 60% of asset managers planning to increase this number over the coming year.
The impact of this is increased operating model complexity. A vast amount of data needs to be aggregated, which is not helped by data sources referencing different security identifiers and with company ESG data not always being provided at the appropriate level of the corporate hierarchy, relative to the managers’ investments. It is therefore unsurprising that some managers are engaging third parties to aggregate and map internal and external data as well as compare ESG data sources where they have multiple instances of the same datapoints, adding to the cost, though in some cases speeding time to market.
ESG data is required across the asset management business, for example:
- in the front office, to support ESG-related analytics and record and track sustainable investments
- for restriction checking, to ensure client mandates or fund guidelines are not breached
- for client reporting and fund reporting
Asset managers need to ensure consistent application of the most appropriate data source for compliance and reporting purposes. This is particularly pertinent for asset managers subject to SFDR whom will be required to report on a new prescribed data set. Therefore, the next big challenge from a data perspective is selecting a provider capable of delivering the necessary data for the principle adverse indicators and ensuring these are appropriately mapped to the fund classifications.
In summary, managers need to:
- identify the appropriate data sources and ensure that there has been sufficient due diligence undertaken in the selection process to satisfy clients and regulators
- implement an effective data aggregation and mapping solution that provides the business with the flexibility to access the data appropriately across business functions
- implement appropriate governance models to demonstrate adherence to guidelines
The quantity of data and complexity is only going to increase – a robust data platform and associated data management processes are required. We advise a range of clients on these challenges. If you would like guidance on any aspect of these issues, please contact us.