Robust reporting capabilities for Environmental, Social and Governance (ESG) funds is now critical for fund managers. Just a year ago, managers were examining ways to incorporate ESG reporting as a ‘nice to have’ for their investors. The ESG landscape has developed so quickly that if a fund does not supply this information to investors, there is a chance a fund will take themselves out of the running on winning new mandates.
David Wallace, Founding Partner at Alternit One (A1) explores the current landscape with regards to ESG data, potential pitfalls and how firms can maximise their data strategy to support business growth and investments.
There is no denying that the ESG market is accelerating fast. According to an article shared by City AM in October 2022, ESG funds are expected to hit $34tn by 2026. In a report carried out by PwC in 2022, 83% of institutional investors in Europe said they plan to increase their allocations to ESG products throughout 2023 and 2024.
As the market continues to build pace, regulators across the globe are moving towards mandatory disclosure requirements for ESG. In most cases, ESG disclosures will be subjected to audits in the same way that financial information is verified. However, a lack of standardised ESG data poses challenges to managers and investors alike. As regulators and fund managers seek to standardise ESG measures, we are seeing issues with the technical management of date. Not all data sets are created equal, and when it comes to engaging with a data source, volume, accuracy, source and cost are all variables to be considered. Firms have a difficult line to tread, as accuracy and source of data is key to mitigate the risk against unintentional greenwashing.
In a report called ‘ESG: Addressing greenwashing in financial services’ carried out in the UK in March 2022, Justine Sacarello, UK Legal ESG Head of the KPMG expressed the need for firms to be proactive when it comes to ‘mitigating the risk of allegations of misleading statements or greenwashing to avoid enforcement action and complaints’. This is especially true when it comes to investigations carried out by regulators and safeguarding a firm’s reputation. In the same report, Sacarello continues to state that ‘greenwashing is a key concern for firms operating in the financial services sector in most jurisdictions’ and that the ‘FCA has recognised the drastic increase in both ESG and sustainable investments in the last few years’. This increase has led to concerns surrounding the validity of data that could mislead or confuse consumers about the nature of their investments.
When considering how to implement ESG into a fund strategy, consistent enterprise-grade security and governance are a significant requirement. The tremendous growth of available data in terms of volume, size, and complexity means it is imperative to also implement an institutional grade data strategy to address the funds growing needs. A realistic data strategy must incorporate a clear road map with milestones, so that strategy documents do not end up as digital assets with no real value. Unless a fund has an excellent strategy in place ensuring data security, data quality, data stewardship, and data governance, ESG tools cannot contribute to superior business outcomes and support winning new mandates and generating alpha.
ESG can contribute to the competitive value of a fund as part of the overall data modelling. This requires a sound technology architecture that can support database storage and access, data flow and sorting of large and granular data sets with the power to produce high quality analytics accurately at speed. Funds should consider their choice of third party vendor when considering implementing ESG, A1 can help firms to overcome hurdles with regards to ESG reporting and data management by helping the business design a robust strategy that enables the business to be accountable to both investors and stakeholders alike.