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“Putting ESG data to work” – How finance companies can optimise this rich new investment resource

By Martijn Groot, VP Marketing and Strategy, Alveo

The ESG market is on a steep upward trend, with global assets expected to surge to $53 trillion by 2022, according to analysis from Celent. ESG data has come to the forefront due to changing investment trends and upcoming new disclosure requirements.

Depending on the investment style, ESG information plays a key role in research, fund product development, external manager selection, asset selection, performance tracking, client and regulatory reporting. In short, ESG data is needed through the chain and must be made available to stakeholders across the investment process.

The ESG data landscape: 

Given this context, the challenge for finance companies is how do they put ESG data to work and  make it more actionable today? The first step on the road is understanding today’s complex and varied ESG landscape. It is a landscape that can be subdivided into three major sub-categories: 

Corporate disclosures: These can be found in the annual report or specific sustainability disclosures. or are reported via questionnaires sent to firms by companies collecting primary data such as Morningstar and Sustainalytics

ESG ratings: These are essentially expert opinions on firms’ ESG characteristics, given by third parties. Firms involved include RepRisk, Arabesque and MSCI

Sentiment data. These are summary scores based on how a firm is portrayed in the news and other publicly available data. Companies involved include Truvaluelabs (FactSet) and Orenda.

ESG information needs to be standardised, to be able to roll up company-based information to portfolio-level information, track ESG criteria against third-party indices or for external reporting requirements. Firms will also need to develop benchmarks to show: the performance of the fund in ESG criteria terms versus overall industry and versus competing funds (with a similar risk profile) and the historical performance of the fund in ESG criteria terms.

Operationalizing ESG data

Data management practices typically start with improvisation through desk level tools including spreadsheets and local databases. This is gradually streamlined, centralised, operationalised and embedded into core processes to become business-as-usual (BAU). When it comes to ESG data management, the investment management industry is in the middle of this process.

Yet today, ESG data quality issues often still prevent effective integration into the end-to-end investment operation. Firms will need to look to solutions here that incorporate dashboards showing the sourcing, processing and completion status of data requirements, as well as insight into data quality metrics and complete lineage to show the provenance of reported data fields.

Readiness and governance

When it comes to data management and reporting, asset managers not only need to fulfil their own disclosure requirements but also have to meet the data and reporting requirements of their institutional investors. The new ESG disclosure requirements lead to higher market barriers and competition across the asset management industry. Being ahead on the ESG regime adaptation curve requires early operational readiness across the value chain by addressing the major decision points around the operating model and governance, target data and system architecture and an effective implementation.

A clear framework of data ownership is crucial to lay the ground for further detailing the operating model and data architecture. When it comes to ESG data, the data owner has several roles:

  • Ensuring the data quality and integrity of the ESG data
  • Specification of workflows for the export and data distributions via interfaces to front, middle and back offices
  • Authorisation for the publication of data, or definition of restrictions regarding approved data recipients.

What a future ESG data architecture may look like 

According to the Sustainable Finance Disclosure Regulation (SFDR), principle adverse impact (PAI) should be obtained “through all reasonable means available”, for instance from internal analysis, external market data, specific studies, public data or directly via issuer contact.

What is required is a process that seamlessly acquires, integrates and verifies ESG information. A solid yet flexible a data management function should facilitate the easy discoverability and explainability of information and effective integration into business user workflows.

ESG data management capabilities should facilitate the easy roll-up of information from instrument to portfolio and blend ESG with pricing and reference data sets, so it becomes an integral part of the end-to-end investment management process.

Data derivation capabilities and business rules can spot gaps and highlight outliers, whether it concerns historical patterns or outliers within a peer group, industry or portfolio. Additionally, historical data to run scenarios can help with adequate risk and performance assessment of ESG factors.

Delivering enhanced value from ESG data 

ESG data comes in different categories and formats. To gather insight from it, it has to be aggregated. This requires capabilities to integrate ESG data with analytics to provision different stakeholders: from portfolio managers looking to decarbonise a portfolio to the finance function providing reports for the investor relations team.

Once a data management system has been implemented, benefits will include effective data onboarding and provisioning business users to securing data lineage and data cost and usage management. This increases the return on any existing and future data investments.

Individual desks will be able to access data, manipulate it, and pass it back to the central repository, where it will be mastered, consolidated and become a single version of truth. And if everyone within the company uses it, the scrutiny around the data and the quality will increase. Sharing IP across the organisation, and contributing to improving the data will, in turn, increase data ROI.

It is positive news also that we are now starting to see the development of comprehensive Environmental, Social and Governance (ESG) data management solutions targeted at the financial services industry. One such solution is being jointly offered by Cognizant and Alveo, following an agreement between the two companies.

As Craig Stanley, SVP and Business Unit Head for Cognizant Banking and Financial Services, states: “This agreement brings to market a unique and necessary solution for financial institutions to evaluate the societal impact of investment decisions and modernise their business practices to better align with their social responsibility goals. Alveo’s data mastering and data distribution solutions, which support financial institutions around the world, together with Cognizant’s digital implementation capabilities will help our clients meet new ESG regulations and the expectations of today’s socially conscious consumer.”

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