For the past decade, Environmental, Social and Corporate Governance (ESG) instruments have become an increasingly popular choice for socially conscious investors and buy-side firms. These investors want to ensure that the companies and other entities they fund share their vision for the future of society. Instead of value investors, think values investors. This has necessitated a marked shift for the buy-side, which requires not just a high volume of relevant data to meet this demand, but also a strategy for making sense of it all.
In our latest article, “How Asset Managers Can Thrive in an ESG-Focused World,” we outlined some of the strategies for systematically integrating ESG metrics into the investment process. By creating a comprehensive scoring system for ESG investment vehicles – and by working with leading technology providers like Confluence – asset managers can keep pace with a changing world while ensuring accuracy and maximizing productivity at every step.
As ever, where there is growth, complexity has followed. Because ESG has seen rapid adoption by asset classes beyond equities, many buy-side firms are ill-equipped to integrate ESG data in multi-asset portfolios, cutting them off from a wide variety of insights that can help them keep pace with a growing trend that has come to define our industry’s recent history.
Drill down into the process and it’s easy to see where traditional ESG processes are insufficient for asset classes like fixed income. Many asset managers, especially large ones, employ teams of dedicated ESG analysts tasked with leveraging ESG datasets to evaluate and assign a score to securities, enabling portfolio managers to efficiently access insights and make decisions accordingly.
One key component of this process is ensuring ESG data about issuers is attached to their respective instruments. With equities alone, this can pose a challenge; throw other asset classes into the mix and it snowballs into a real problem. In the fixed income space, there may be dozens or hundreds of bonds trading for a single entity, some of them under subsidiary or otherwise disparate names. Properly attributing data across the ultimate parent structure is a hugely time-consuming task for ESG teams.
Then there’s the work of scoring each instrument – normalizing ESG datasets that may come from different providers; building a formula and averaging the numbers based on subcategories ranging from water consumption to company board composition. After the scores are created, they must be integrated with the full investment process. Weighing ESG criteria against traditional metrics such as average yield, risk and volatility unlocks powerful insights, but it’s also a lengthy process.
To solve for these challenges, asset managers must leverage technology to take a systematic approach to attributing ESG data to the appropriate instruments, creating normalized scores and integrating them into the wider investment process. Our Delta ESG Hub meets such needs and can streamline the ESG process through an efficient and transparent workflow.
The Delta ESG Hub makes use of open architecture which enables firms to easily combine datasets to create a single consolidated set of ESG metrics, ensuring the data is properly attributed across the ultimate parent structure. Integrating new datasets is easy, regardless of where they originated. In addition, the Delta ESG Hub provides a robust scoring system enabling asset managers to assign individual weightings based on individual/industry ESG criteria as well as a host of other factors. Clients get the best of both worlds: a ready-made platform with all the configurability of a custom-built scoring solution.
Once the data is integrated and the instruments have been scored, it’s time to bring them into the wider investment process. By combining these metrics with best-of-breed analytics, risk and performance factors, the Delta ESG Hub provides a complete picture of the portfolio exposures and risk drivers. This enables asset managers to make investment decisions with more precision and build more diverse products for their clients.
Even the most critical innovations lead to disruption and inefficiency in the short term, and that’s exactly what we’re now seeing with ESG. Asset managers recognize its importance in terms of both meeting investor demand and shaping the future of our world – they simply haven’t had the tools to meet the moment with efficiency.
Now they do. Confluence’s Delta ESG Hub guides the data through every step of the integration process: enabling metrics to cascade down across the ultimate parent structure, scoring instruments based on custom criteria and demonstrating their impact on portfolios through powerful analytics. Through this systematic approach, asset managers can serve their clients and help create a brighter future without sacrificing any of the sound investing principles that brought them to this point.