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The ESG Data Challenge for Asset Managers

The ESG Data Challenge for Asset Managers 1

By Paul Elflain, Head of Asset Management, Linedata

The pressure is on for asset managers to seriously consider their role in the sustainable finance revolution, and as a result, conversations surrounding sustainability have continued to pick up the pace over the past year. This has been exacerbated in 2021 not only by new EU regulations, but also by US President Joe Biden’s commitment to climate change policy. In turn, ESG criteria is increasingly a must-have for incoming generations of investors who are committing to sustainable finance. Younger investors value transparency and expect ESG factors to be meaningfully and legitimately implemented into their portfolios, rather than just buzzwords and empty promises that might constitute ‘greenwashing’.

Asset managers must accept that sustainability is not just a trend in the industry – it’s a trajectory. From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets – a 96% increase from 2019. With new sustainable funds on the rise, introducing standardisation of frameworks is critical and is the driver behind the EU’s new Sustainable Finance Disclosure Regulation (SDFR). This was implemented on March 10th this year, but the real deadline for change is now July 1, 2022, when the associated reporting requirements come into effect. This has been pushed back by six months from January 1st 2022 – a welcome development due to the complexity of the task at hand.

But with less than a year to go, time is still running out for asset managers to ensure compliance. Gathering ESG data to appropriately score financial products is challenging in itself, as SFDR requires data from multiple sources and multiple vendors – and the required data is often costly or unavailable. This is a complex and resource-heavy undertaking, but there is a second challenge at hand. There is much to be done behind the scenes to integrate this valuable ESG intelligence into tools and workflows, so that it is placed at asset managers’ fingertips.

Sourcing ESG data: what are the options?

Asset managers now face an important decision: either they can build up new teams in-house whose role is to access, evaluate and score stocks by ESG criteria, or they can outsource this function to technology vendors and ESG data providers. With a minimum of 32 sustainability metrics that individual products will be scored against, sourcing ESG data, calculating and reporting the resulting scores will be no small feat in time for July 2022. Ensuring efficiency and carefully planning resource distribution are the two most critical factors when making this decision.

Many smaller firms simply do not have the capacity to build brand new teams to carry out these new functions. Instead, working with an independent provider can help demonstrate that scoring is impartial while encouraging standardisation in frameworks across the industry. Outsourcing is also an attractive option for larger firms looking to achieve compliance efficiently in order to spend more time strategizing and launching new funds. This means a partnership approach is likely to emerge as the most popular option to access and manage ESG data.

Integrating ESG data into workflows

The direct integration of ESG data and scoring within their software gives managers a key competitive edge, but this can represent an enormous challenge as for many, workflows and software simply cannot be adapted so quickly and all too often, firms find themselves scrambling to respond to new regulations. But those that are successful will have a head start in creating and marketing new ESG funds, ensuring compliance and positioning their firms as sustainable and ESG friendly. This then opens up resources to consider new investment strategies, providing the foundation to create new ESG products and boost competitiveness by differentiating the firm’s offerings.

For those who still use on-premise servers and legacy technology, the process of integrating new rules into software can be a slow, burdensome and costly task. Those already  embracing cloud technology have a significant advantage because cloud-based data lakes can break down data silos and scale up and down quickly, and it is easy to layer new analytics on top, simplifying the task of collecting and then scoring ESG data.

How can asset managers stay competitive?

Despite the challenges and pressure on resources that SFDR compliance is likely to create, the new regulation should be welcomed by asset managers as it represents a gateway to new opportunities and a levelling of the playing field. There are opportunities to be taken in the creation of truly sustainable financial products that will attract the next generation of investors, and firms will no longer be able to get by through empty rhetoric or opaque data points that can be labelled as ‘greenwashing’: everyone will need to walk the talk.

A partnership with a service provider may represent a quick and easy way to ensure compliance without pulling on resources, for firms of any size. The right partnership could free up resources by reducing the time spent ensuring regulatory and investor reporting requirements are met and cutting down the number of data vendors needed. These resources can then be channelled into enhancing portfolio strategies and bringing new products to market. Fast access to ESG data will also empower asset managers to make informed decisions ahead of their competitors, regarding which well-performing companies they should include in sustainable and ethical funds.

Firms should consider as a priority whether prospective partner’s solutions are cloud-based as this will affect not only speed of implementation, but also scalability. Speed and scale will be fundamental to taking reliable ESG products to market quickly and expanding internationally. The opportunities are clear, and the race to July 1st is on – but with the right partner, the race is already half won.

The ESG Data Challenge for Asset Managers 2

Paul Elflain, Head of Asset Management, Linedata

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