Environmental, Social, and Governance (ESG) investing has gained significant momentum in recent years as institutional investors increasingly prioritize sustainability and responsible investing. While asset managers are keen to embrace ESG strategies, they face a major hurdle: ESG data management. According to BNP Paribas’ ESG Global Survey 2021[1], as interest in ESG among institutional investors continues to accelerate, ESG data remains the primary barrier for asset managers to integrate ESG strategies with 59% of survey participants indicating data issues are a top-two impediment to ESG integration. Similarly, in a recent study by bfinance, 84% of global institutional investors indicated “a lack of consistent and standardized environmental, social, and governance information from money managers” as a challenge.[2]

The Multitude of ESG Frameworks

One of the core reasons for the ESG data management challenge in ESG investing is the presence of numerous ESG frameworks established by regulatory bodies globally. With approximately twelve ESG frameworks and over 57 written guidelines encompassing various dimensions and criteria, asset managers face the daunting task of navigating through a complex web of regulations. Notable frameworks include the Social & Human Capital Protocol, as well as guidelines from the Sustainability Accounting Standards Board (SASB) and Principles for Responsible Investment (PRI).

Using the Sustainable Finance Disclosure Regulation (SFDR) as an example, asset managers will be required to break out how they consider Principal Adverse Impacts beginning July 1st, 2022. This can include nine indicators related to climate and environment, and five indicators on social and employee issues, human rights, anti-corruption, and anti-bribery matters. In addition, there are another 16 environmental and 24 social indicators that are optional.[3]

Whether choosing ESG investing, socially responsible investing, or impact investing, asset managers need to create their own set of measures based on the nature of investing they are executing and classify them based on regions and sectors. With this need, IVP has created a sample framework of mandatory and voluntary reporting indicators as a starting point. Below is an illustration of the IVP framework for SFDR.

Lack of Consistency and Standardization

Adding to the complexity, the ESG data landscape is crowded with various data vendors, including traditional index companies like Bloomberg and MSCI, and specialized firms such as Sustainalytics and RepRisk. However, the challenge lies not only in the number of vendors but also in the lack of consistency in definitions and ESG reporting standards across different providers. The Organization for Economic Cooperation and Development (OECD) has revealed significant differences in ESG scores and ratings for the same company across rating providers. [4]  For instance, Tesla has been rated at the bottom 10% by one agency (JUST Capital) but receives an “A” grade from another (MSCI). [5]  This inconsistency poses a challenge for investors seeking reliable ESG information.

Addressing the ESG Data Management Challenge

Leading asset managers are actively addressing the ESG data management challenge by developing internal guidelines and standards for data selection and implementing comprehensive data management frameworks. To effectively manage ESG data, managers require best practices and robust data management solutions. The following characteristics are essential for an effective ESG data management framework:

  • Ability to integrate ESG data dictionaries seamlessly
  • Issuer Master capability with the ability to structure hierarchical linkages across companies
  • Modules to consistently deconstruct standardized guidelines like SASB and UNPRI
  • Exposure, P&L, and performance attribution framework for stratifying measures across ESG factors
  • Analytics capable of normalizing vast, diverse data into user-friendly data sets and visualizations

In the rapidly expanding landscape of ESG investing, data management has emerged as a significant challenge for asset managers. The presence of multiple frameworks, reporting burdens, and the lack of consistency across data vendors pose hurdles in leveraging ESG opportunities. With a robust ESG data management solution in place, asset managers can establish a reliable framework for ESG investing and overcome data management obstacles.

IVP offers an ESG Center of Excellence designed to help asset managers establish a reliable framework for ESG investing that supports accurate and efficient portfolio construction, asset allocation, risk management and compliance, and regulatory reporting.

To learn more, visit IVP ESG Management or contact sales@ivp.in.

[1] Shanny Basar, “ESG Data Primary Barrier to Integration,” Markets Media, September 13, 2021

[2] Paulina Pielichata, “Lack of consistent ESG data a big challenge for investors – survey,” Pensions & Investments, February 8, 2021

[3] “Explaining the European Union Sustainable Finance Disclosure Regulation (EU SFDR),” J.P. Morgan Asset Management, June 30, 2021

[4] Jennifer Laidlaw, “Lack of standardized ESG data may hide material risks, OECD says,” S&P Global Market Intelligence, October 2, 2020

[5] Billy Nauman, “Fund managers struggle to compare ESG apples with oranges,” Financial Times, May 11, 2020.