Sourcing data and using it effortlessly in investment decision-making: the challenge of the ESG revolution in asset management
Year after year, financial professionals are increasingly integrating sustainable development concerns into their investment strategies and in their relations with their business partners.
Pressure from investors has undoubtedly been a major factor in the decision to integrate this new dimension, and many manifestos have already appeared in managers’ investment principles and fund prospectuses. However, there is sometimes a gap between the sincerity of these manifestos and the reality of management policies, which is made possible by the absence of standards in the definition and, above all, measurement of ambitions.
The recent introduction of European regulations on these topics, particularly the "Disclosure" and "Taxonomy" directives, aims to correct this byimposing definitions and the most extensive transparency on intentions, but above all a measurement of objectives and therefore of the progress made when one claims to manage assets in an ESG-compliant way.
No measurement of progress without ESG data
As a key issue in sustainable finance, data on the various ESG criteria is the subject of all the negotiations within the European working groups, but also of an intense commercial battle between data providers.
The good news is that the range of services is extensive, and it is even possible to collect raw data directly from companies. This is what Private Markets managers do, and they do not necessarily have any other solution than to distribute questionnaires to the companies they invest in to collect the data they need. It is also a choice made by the most advanced management companies in the listed world who prefer to work on first-hand data and have total control over their methodologies for calculating their management ratios.
Thus, each player in sustainable asset management must have the data adapted to the lines defined in its strategy on the one hand, and the operational set-up allowing to use it effectively in its investment process on the other.
The choice of "home-made" data
In terms of data sourcing, SGSS' recent survey1 of some 30 European asset managers showed that most respondents used more than one data provider as the basis for their analysis, but also that the vast majority of them reviewed the measures and methodologies obtained from these analysis agencies with their own opinions, drawn from their interviews with the companies in which they invest.
This is undoubtedly a sign of the maturity of these managers who are seeking to take ownership of the measurement of the efforts of companies that they fund. Beyond that, it is an additional difficulty in sharing an objective vision of a company’s situation with regard to sustainable development criteria. Indeed, the measurements of a company's position on almost all the ESG criteria defined by the experts are already very different from one data provider to another.
However, the difficulty of integrating the sustainable development dimension does not end there. It is still necessary to be able to use this data daily in asset management tools.
Integrating this data into the investment process is no easy feat
Managers very often use an ESG database separate from their PMS2 in which they realise their investment decisions. These ESG databases are more or less homemade, sometimes very much so for non-listed assets. They are often populated manually, again especially in the unlisted sector, and are often used to create a first level of filter to define the authorised investment universe, taking into account various exclusion choices.
It is therefore complex to mix financial and non-financial criteria.
It is difficult to carry out simulations to assess the consequences of a choice of security on the positive impact criteria of a portfolio, such as limiting its temperature or greenhouse gas emissions...
It is also quite challenging to use this data throughout the processing chain, whether for middle-office reconciliations, custodian controls or the production of reports for investors, of course, but also now for the communications made mandatory by the new European regulations (SFDR annual report in particular).
Many fintechs offer data management solutions (quality control of data from several suppliers, combination of data from several sources, etc.) and calculation optimisation. But apart from the fact that these are often external processes, they only offer functionalities that are limited to certain needs.
CrossWise: the solution to achieve your ESG ambitions
Nevertheless, comprehensive solutions do exist, making it possible to automatically integrate the right data sets specific to each management company, to then use them directly in their PMS, to configure and control management rules on the basis of the ESG investment choices made.
This is the ambition of the CrossWise platform developed by SGSS in partnership with SimCorp, which aims to enable asset managers to use ESG data at the heart of their investment selection process, in the same way they leverage financial data.
And it is simply to achieve this that CrossWise has been designed, and it starts with making sure that the PMS is correctly interfaced with each client’s data sources. Then, this specific client’s ESG data set will be used all along the investment process, for pre-trade compliance checks and for all middle-office processes.
In doing so, ESG data becomes fully integrated into the investment methodology and is no longer a mere additional item managed separately in an inefficient process restricting asset managers’ ambitions and keeping them from acting on their ESG convictions.
1Survey conducted by SGSS in the first half of 2021 among 30 of its listed and non-listed asset manager and owner clients
2Portfolio management system