A recent survey report from the Index Industry Association (IIA) highlights that getting better, more standardized and comparable data on Environmental, Social and Governance (ESG) performance is considered one of the biggest challenges facing asset managers. In fact, 61% of the asset managers surveyed said that a lack of agreement amongst vendors on how to rate ESG performance is a major challenge for their firms.
But should data standardization really be the primary focus for the ESG space. Indeed, is far-reaching standardization even desirable? Elisabeth Seep, Head of ESG Product Management at RIMES, gives her thoughts: “The ESG market has moved beyond the ‘early adopter’ stage and is entering the ‘early majority’ phase. As it does so, there will be an adjustment period as firms get used to the data landscape, which is very different to traditional investing.
“When looking at financial data, firms are used to black and white assessments. Credit ratings, for example, are broadly similar across ratings agencies because they are based on similar methodologies and precise data on financial performance.
“The ESG space isn’t like that. There are a greater variety of ways of looking at companies and assets and of interpreting data – and that’s a good thing. It is precisely because of this variety that asset managers will be able to differentiate and secure alpha. Ultimately, that means happier clients and bigger fees.
“When it comes to ESG standardization will therefore largely be a regulatory concern, and firms will need to comply with any rules that emerge around reporting standardization. However, for the most part asset managers’ focus should be on mastering data rather than standardizing it. Mastering ESG data allows firms to make the most of a wide variety of data sources to achieve a broad view of a security. Firms can see where different data providers agree and disagree, where there is consensus and whether there are outliers in the data. This is all useful data for analysis, and will provide the bases of differentiating insights.
“Rather than waiting for data standardization, firms should therefore look at how best they can source, validate, scrub and master ESG data from the broadest possible universe of providers. In this regard, there is no better approach than to work with managed data service providers like RIMES. We can take on complex and burdensome data management tasks so that firms can focus on using their ESG data to differentiate and secure alpha.”
As the ESG market matures, regulators are keeping a close eye on potential cases of “greenwashing”. The second blog in this series will look at how firms can integrate ESG without putting their firms’ reputation at risk.
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