ESG: In the spotlight

By Michael Asher, President and COO, RFA

ESG investing has exploded in popularity, forcing firms throughout the industry to react and make sure they are able to capitalize on this unprecedented change in demand.

As an industry, for some time, we have been grappling with the best approach for harnessing, and reporting on ESG data. Currently, ESG data is not standardized so, depending on the strategy, managers are left to do their own research and integrate that with third-party data. And third-party data, depending on the provider, is based on different methodologies for assessing companies as well as country EGS risk ratings. Increasingly managers are also asked to formulate ESG theses and provide climate related data when reporting on their portfolios. This can be expensive and where there are gaps in the data, modelling is required in order to estimate carbon footprints or the carbon intensity of certain products. Europe has moved to the EU-mandated SFDR, the UK and US don’t yet have such a framework.

Overcoming this from a technical standpoint is no simple feat. Critical to integration is selection of a platform that at once meets the ESG need without disrupting current operations. As there is currently no agreed upon industry standard, firms need to clearly articulate the metrics they have selected, how these were chosen, how they will report, and how they will be audited. Of the dozens of reporting frameworks, the top 5 are CDP, CDSB, GRI, IIRC, and SASB. There are so many because of the wide variety of companies now participating in ESG reporting, across all manner of sectors. Each with their own ESG aspects and impacts. Understandably they will need to report on different metrics. Likewise, different stakeholders such as investors, regulators, and customers are interested in different types of information.

Best practice advice

There are steps that can be taken by firms to start integrating ESG reporting into their data modelling:

• Once ESG theses is formulated, allocate suitable resource to design a process how to capture new data and mine existing data to validate your approach. That said, ESG data is much like any other data that firms have integrated in the past.
• Have an articulated and documented program, tied to and reflecting compliance mandates. Harvest what is available from current operations and rely on the expertise of others to mitigate operational risks related to ESG.
• Ensure your infrastructure and platforms are designed to scale as ESG reporting and compliance requirements change rapidly in the near future.

If your firm already has an ESG policy in place, we are seeing rapid advancements in enhancing current reporting and technical capabilities. Given the relative newness and complexity of ESG, design, implementation of initiatives will be corporate wide and delivered in first instance at the executive committee/board level. Both internal and external training and communications will be essential for success. Individual managers will likely be involved in reporting for their areas and for being prepared for audits.

Upcoming opportunities and challenges

At RFA, we have been streamlining data solutions for some time. Digital transformation has allowed managers to embrace cloud technology and data warehousing to store both research and client data in a secure and efficient way. Centralized data dashboards, often built as a client specific platform, allows managers to access their data and get a 360 degree view of their data landscape.

ESG is getting a lot of attention right now, and regardless of your opinions of it, taking notice of new reporting requirements is in your firm’s best interests. For one, global regulators have begun to weigh in. It is too early to tell but it seems that basic standards will apply to all market participants with nuances based on particular needs of investors and the relevant measures to support those needs.

Firms can look at adopting a strategy that prioritizes content delivery according to audience needs. This will help reports better engage diverse audiences. Companies can do this by having a balance between a collection of elements that satisfy the many audiences of the modern ESG report. This requires treating each stakeholder set as a unique audience group and respecting their distinctly different demand from companies. To engage investors, smaller funds can use ESG resource hubs to make data easy to access and useful.