Using data to drive positive change

Having gradually gained ground in recent decades, ESG investing now appears destined to dominate mainstream asset management. A stronger focus on investment opportunities that could save the planet may also save the asset management industry. Increasingly, investors are prepared to pay more to firms they trust to invest in line with their values to generate specific outcomes. But this is not a matter of greenwash. Asset managers must ensure their business models are credibly sustainable throughout their networks and supply chains. They must also overhaul their operations to use data effectively to deliver on their promises.

Mindset shift

January brought evidence of a mindset shift, when Blackrock CEO Larry Fink pledged to demand corporate action on sustainability , including reporting on climate risks and aligning operations with UN CO2 emission targets. Fink also committed to “making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk; launching new investment products; and strengthening our commitment to sustainability and transparency in our investment stewardship activities”.

Blackrock is the largest, but not the first. TCI Fund Management, Europe’s third-largest hedge fund group, issued a similar ultimatum last year. Managers have been wrestling with the practicalities of incorporating non-financial factors into investment decisions for several years. As ESG-focused approaches broaden out from negative screening to highly engaged impact investing, much depends on data. Assessing investments from diverse angles; monitoring performance and risk against multiple metrics; keeping portfolios within mandates; demonstrating results to investors; providing oversight to compliance officers and regulators: all require a wholesale review of data sourcing, analysis, storage and distribution.

Asset managers face challenges maintaining an accurate view of investments even when solely concerned with financial performance. In theory, a centrally managed securities master file should hold a single, accurate record of all data relating to an individual holding. In practice, crucial information can be added to or altered in other systems over time, leaving the securities master out of date or incomplete.

Data and reporting discipline

Increasingly, however, asset management firms are adhering to higher levels of data discipline. New tools are analyzing data sets in new ways, often incorporating machine-learning capabilities, to identify patterns and / or anomalies that can drive new efficiencies or value. In parallel, clients, regulators and other stakeholders are requesting raw data feeds, rather than formatted reports, to improve timeliness and flexibility of data flows.

These innovations require clean data sets and strong data management practices that support centralized control, frictionless exchange of data between systems, and plug-and-play interoperability. The benefits are many and can contribute significantly to ESG integration.

At one level, building portfolios to meet ESG-related targets requires managers to utilize diverse new data sources and analytics to assess the performance of holdings across a blend of metrics, from emissions to boardroom diversity to employee remuneration. At another, investors can be provided with accurate, timely and tailored information on fund performance, mapped against external benchmarks. In both cases, efficient data management is integral to managers’ efforts to provide the sustainable fund products and differentiated service levels needed to grow AUM.

Flexibility is critical. Many institutional investors have yet to decide how to order ESG priorities and articulate revised investment policies. On the retail side, a new generation of investors who see no tension between doing good and earning returns are only now making their voices heard. Managers must respond as client preferences mature, also keeping abreast of new data streams and reporting formats, analyzing in greater detail the performance and characteristics of the business models, supply chains and assets represented in their portfolios, not to mention evolving regulatory requirements.  Alongside its newly unveiled €1 trillion Green Deal Investment Plan, the European Commission will revise its Non-Financial Reporting Directive later this year. In addition, the EU’s new ESG disclosure directive , which must be implemented by 10 March 2021, will require asset managers to publish the ESG aims of their funds and how ESG impact and sustainability risk are factored into the investment decision-making process. The spirit of Europe’s disclosure rules may be followed by other jurisdictions, but not the letter.

From an operational perspective, the ESG challenge calls for renewal, not wholesale replacement. Tools and processes for maintaining portfolio compliance with investment mandates can be adjusted to account for a wider range of factors, for example. More far-reaching responses may be necessary to ensure other platforms, including order management systems, can perform in this new and fast-developing environment.

Embracing agility

Given the scope for significant change and growth in ESG investing by 2030, the only option is for asset managers to embrace agility. This means combining a flexible data management model and technology infrastructure with an evolving mix of third-party tools and data and supporting services, accessed continuously and seamlessly via API-based connectivity and cloud hosting.

As asset managers develop data strategies focused on efficiency and quality, they may come to value a new stakeholder in their ecosystem: the data broker and accountable third party that will provide and certify the quality of the data used to drive decisions in ESG integrated investment processes.

Momentum is building fast. Investors with a combined US$86 trillion AUM recently predicted “abrupt and disruptive” climate policies by 2025. The private sector is preparing. Already, over 800 companies worth more than US$11 trillion have signed up to the Science-Based Targets Initiative, an NGO consortium which certifies and monitors alignment with the Paris objectives. By 2030, anything less than an enterprise-wide embrace of ESG could be an unsustainable position.

About the author, Timothee Raymond

Timothee Raymond is the Head of Innovation & Technology at Linedata.