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Data and Regulation: the Growing Pains of ESG

Environmental, Social and Governance (ESG) criteria are becoming an increasingly important part of how institutional investors build products and manage their clients’ money. This trend is largely driven by market demand. In 2016, ESG-based products accounted for some $23 trillion in assets under management, increasing to more than $30 trillion in 2018. The market is forecast to rise to $35 trillion by 2020. Conversely, investments in tobacco and weapons are now deemed unacceptable by, respectively, 94% and 93% of ESG portfolio wealth managers.

However, while there is significant momentum around ESG, the market is still in its infancy. This is nowhere more apparent than when it comes to the corporate data that underpins ESG portfolios. With little standardization, ESG data is spread unevenly across different equities and securities types. In fact, a recent survey of asset owners and managers by BNP Paribas Securities Services, two thirds of respondents cited data as the main challenge of ESG investing.

These challenges have recently come to the fore in debates around the topic of ESG regulation. The Alternative Investment Management Association (AIMA) has issued a primer on the topic, arguing that any regulatory framework to emerge must apply a broad brush and encompass the behavior of issuers as well as institutional investors. Indeed, AIMA believes that very first thing regulators should do is help establish a solid and standardized data foundation on which the market can grow – only then should they look at what fund managers are doing.

All this serves to highlight that the ESG market it still nascent, and that much work will need to take place over the next few years to ensure a transparent, investor-led market based on data that represents an accurate and sufficiently detailed picture of companies’ ESG activities.

Of course, this is not to say that firms should delay their rollout of ESG products. To do so would be to fall behind in what will ultimately be a very profitable and important product segment. While the data required for ESG falls into place and the regulatory framework takes shape, firms should be able to efficiently and consistently source and analyze the ESG data that is available today. Here, working with companies like RIMES that can source, structure and cross-reference ESG data, which is often from multiple sources and in multiple formats, can add significant value.

This managed services approach ensure that firms can get seamless access to the highest quality data available and put it immediate use in their operational systems customized to their needs. It also makes firms fit for the future, as any new data sources, formats or types can be quickly added to the feed. In a market still affected by uncertainty, managed data services provide a solid but flexible data foundation.

RIMES will be discussing ESG data and other key topics relating to financial data management at its Client Conference on June 20 in Boston. Register now, or contact events@rimes.com with any questions

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