ESG data and your RI strategy

Intelligent investors know that there is more to what drives investment returns than what gets reported in financial reports. These investors understand that assets don’t thrive if they ignore environmental, social issues, corporate governance or ethical issues (something referred to as ESG).

We all recognise that responsible investing (RI 1) will evolve to become more transparent and focused as member and client demands change and regulators introduce ESG regulations. But if these reasons alone aren’t enough to convince you, there are many other recognised benefits to consider RI: –

  1. Lower legal and regulatory risk
  2. Improved ability to identify dynamic, innovative and productive assets 
  3. Potential increased returns from investing earlier in an assets life cycle

Also, don’t underestimate that investors care about ESG issues.

Access to trusted ESG data is a crucial driver to success in RI

Access to better data will drive progress in responsible investing, but it takes some time to get there. But what does ‘better data’ mean in a world where it is acknowledged that there is a lack of consistent ESG-related risk disclosures? It is data that is consistent, comparable and reliable.

A case in point, while credit rating agencies have a high level of correlation between scores (S&P and Moody’s is around 0.99), the ESG rating agencies’ scoring differs significantly, with an average correlation of 0.61. As there is no clear governance and regulation on what constitutes an ESG rating, firms and investment managers need to read the data and evaluate its worth in relation to their RI strategy.

There is no doubt that correlation will improve over time and to this end two global sustainability standards bodies, SASB and the IIRC, are merging into the Value Reporting Foundation (VRF), which is set up to champion a set of more robust sustainability metrics that are: Material; Comparable; Consistent; Reliable, and Connected to information in financial statements. There is now part of a more comprehensive drive towards consistency of ESG analysis and disclosure as part of international accounting standards.

Making the most of this data will be a challenge

As the quality and quantity of ESG data increase, making sense of it quickly and efficiently becomes critical; you can’t do this on your old spreadsheet. As a result, many investment managers are investigating how they bring together this new data with their existing holdings information to improve their insights. Making it easier for funds to leverage these data sets has been an area of significant focus for us at AlphaCert. Our teams have worked with the ESG datasets from data suppliers like Refinitiv’s to create an ESG module.

Our ESG module automates the management of ESG data, giving users trusted data at their fingertips. What’s more, we have built-in connectors to the standard data suppliers. All this means you can quickly get accurate and verified information into your analysis tools in a fully automated and auditable way. Combine this with the deep data management functionality offered and you have trusted data that can be used downstream to deliver the ESG insights to support your RI strategy.

AlphaCert can combine ESG data from multiple sources and vendors, merge it with holdings data to bring insights to, amongst other things, signal a high concentration of holdings, ultimately highlighting critical relationships between your ESG and holdings data.

If you want to hear more about our ESG module, please reach out. For more on ESG best-practice methods and tools available, watch our Virtual Roundtable, where our exclusive panel discusses how to operationalise ESG in your investment data.

1 Responsible investment, also known as sustainable or ethical investment, is a broad-based approach to investing which factors in people, society and the environment, along with financial performance, when making and managing assets.

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