Environmental, Social, and Governance, or ESG, investing factors have recently received mixed media coverage. As a result, investors have been discussing how or whether they want to incorporate ESG into their investment process while simultaneously helping shape the evolving landscape.
The regulatory landscape remains fluid, with requirements varying in scope, scale, and lifecycle across jurisdictions. The primary drivers include:
- Need for transparent reporting
- Evolving definition of fiduciary standards
- Asset owner preferences
A 2019 Morgan Stanley survey found that 85% of respondents were interested in sustainable investing, with interest in plastic reduction, climate change, community development, and circular economy.[1] This means many investors, not just those with ESG specialties, need a clear view of their portfolios’ exposures across multiple dimensions.
It is equally important for financial professionals to deliver alpha to their clients over the long term. While fundamental metrics are easily accessible to all investors, the informational edge for those with a long-term focus is understanding the drivers of future cash flows. This includes company culture, intangible assets, governance policies, and other risks not easily discerned in quantitative measures.
Financial professionals incorporate these hard-to-quantify characteristics in their portfolio creation process without explicitly considering them as ESG factors in their marketing outreach. Corporate Governance, for instance, has significant impacts on the longevity of a company. For example, board composition, audit quality, executive pay, and comprehensive business ethics are critical to consider while conducting investment due diligence.
From a research and data perspective, this really amounts to widening the funnel and incorporating more information into the decision-making process. While at the research level, firms may have dedicated teams to perform deep dives into companies, quickly managing and integrating this data across many issues and thousands of individually managed portfolios, which can overwhelm existing processes. Further, determining exposure to specific themes or types of firms can become a major headache considering individual client preferences and values.
However, as ESG integration is becoming more generally accepted and recommended, it is not mandated. Nevertheless, investors must supply proof through reporting and transparency if they integrate ESG factors into their investment process. While a thoughtful, measured approach is critical to defining and implementing ESG policies, one aspect can help cut through the noise. Data is the great equalizer.
As with all investing, decision-making investment and advisory firms must incorporate more than just numeric data points and ratios. Needing to start somewhere, incorporating data from ESG rating agencies gives investors a jumping-off point to understand the sentiment, areas of opportunity, risk, and areas of disagreement or those needing more research. While managing the multiple levels of data for a single portfolio is not too demanding, doing so across many accounts is incredibly challenging.
To help solve this problem, SS&C Advent has collaborated with Morningstar Sustainalytics to incorporate its ESG Risk data. By enriching portfolio data with ESG scores in the cloud, firms working with SS&C Advent platforms can see various ESG data points across their portfolios and books of business. Most importantly, users can examine outliers and metrics in aggregate while also being able to drill down and get more details on the drivers of those scores.
Whether ESG data is integrated for risk management or client preferences, ensuring consistency in portfolio management is crucial. For example, carbon risk information will also be available on the SS&C Advent platforms. Since the measurement of carbon footprints and carbon intensity are widely agreed upon, users can see aggregate portfolio-level carbon data and the positions in portfolios contributing to these exposures.
A clear line of sight into carbon risk will continue to increase in importance as regulators and investors refine and mature their environmental requirements. Even if this data does not directly influence decisions, it supplies more context for investment teams to explain their choices and conduct a more nuanced analysis of potentially problematic positions.
Whether explicit or implicit, the inclusion of ESG factors data into investment decisions will continue to evolve. The question for investment firms is whether they will have the ability to harness the power of this information and be prepared to act when needed.
For more information on how SS&C can support your advisory firm, request your personal demo, call 1-800-727-0605, or email info@advent.com.
[1] Morgan Stanley survey finds investor enthusiasm for sustainable investing at an all-time high, Sept.12, 2019
