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Setting the standard for institutional investment with ESG data

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By Gayatri Raman, Head of EMEA and APAC, Clearwater Analytics

The quest for sustainability is causing a momentous shift across the asset management industry. Eager to demonstrate their green credentials and encourage investment, many businesses have signed up for a range of initiatives. These include the United Nations Principles for Responsible Investing (UN PRI) and the Task Force on Climate Related Financial Disclosures (TCFD).

Globally, Europe is leading this charge towards responsible investing, with Environmental, Social and Governance (ESG) regulations the subject of particular interest. In fact, half (50%) of net inflows went into ESG-related funds last year. Within this class of investing, sustainable, ethical, and corporate governance factors are used to evaluate a company’s future financial performance. Therefore, insights into how a business treats its employees or the size of its carbon footprint can determine investment decisions.

While some organisations have already voluntarily opted into these regulatory processes, responsible investing will soon no longer be just a “nice to have.” Pressures on the industry are deepening, and Europe has been the first region to introduce a standardised approach to ESG reporting in the form of the Sustainable Finance Disclosure Regulation (SFDR). While this is a step in the right direction, more needs to be done to create an industry benchmark, beginning with a widely-accepted definition of sustainable funds. Only then can the market meaningfully minimise environmental impact.

Navigating uncharted waters

As it stands, sustainable investment means everything and nothing. While managers have been keen to label their funds as socially responsible, and thus worth investing in, we do not have a consensus on what this means, or how to reach this title. This is because the significance of ESG data is determined by the end-user, so while one investor may prioritise low greenhouse gas emissions, another may care more about a company’s diversity reporting. As a result, there are over 100 external ESG data providers offering a range of sustainability ratings, all calculated using various metrics and methodologies.

Without commonly-accepted guidelines, responsible investing has become increasingly complex. Clearwater’s recent survey with Sionic found that the preparedness of European firms for ESG has been greatly impacted by the absence of criteria on sustainability. Due to this, reporting between managers has become inconsistent, leading to concerns among asset owners about the quality and relevance of these documents.

Setting the standard

To mitigate confusion and enable the comparability of funds, there is a growing demand for greater uniformity across sustainability reporting from both asset owners and managers. For instance, 73 percent of asset owners want to standardise the ESG-related reports generated by managers. However, only 18 percent are currently able to undertake this. Therefore, regulators must implement benchmarks on sustainability to ensure that reporting is effective and consistent, regardless of the firm.

Standardising reporting will enable investors to compare funds by measuring ESG performance and identify investment risks. While complete harmonisation may be unlikely in the immediate future, there are actionable steps that can be taken to create industry guidelines. This process must begin with a clear and consistent definition of sustainable assets.

Putting data at the heart of sustainability

Robust data will be crucial to providing a single source of truth for ESG metrics for investors. However, the institutional investment market is currently faced with disparate and inconsistent data sources, leading to issues in tracking sustainability. The key concern is incomplete data which makes reporting impossible.

To facilitate transparent and reliable reporting, asset managers and owners must eliminate the frictions within their data management platform. Firms need a technological solution that can aggregate and map complex ESG data. This will provide clients with reports that can be tailored to their specific needs around sustainability, in addition to giving their responsible investment teams accurate, consolidated data and analytics capabilities. Thus, by leveraging technology, asset owners and managers can not only enhance internal reporting and the client experience, but also offer more well-informed, sustainable insights for investors.

High standards for the industry

As ESG matures and grows in popularity, regulators must do more to standardise responsible investing across the industry. At the heart of this strategy is data. In order to provide insightful client reports, firms must deploy technology that can aggregate and map complex sustainability data as well as generate valuable analytics.

While benchmarking ESG metrics may seem like an overwhelming mission for the industry, the first step is to create a clear and consistent definition of sustainable funds and investments. With such a guideline, asset managers and owners can then provide accurate and useful data for investors and ultimately help to drive positive environmental and societal impacts.

Global Banking & Finance Review


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