Few topics have dominated wealth and asset management conversations quite as much as ESG in the past few years. Sparked by investor demand and questions about the impact of ESG on performance, virtually every firm has had to answer the question of how it factors ESG into investment research and portfolio construction. Firms would benefit from having a well-defined ESG strategy, and the ability to explain it to clients. Eventually, they may need to be able to explain it to regulators as well. Regulatory momentum is increasing in North America and Asia, with reporting requirements already well underway in Europe.
Incorporating ESG into investment decisions starts with obtaining reliable data from one or more of the many providers that have come to market in recent years. Firms then need to aggregate and normalize that data, and map it to their portfolio holdings. This can be a laborious, time-consuming, highly manual process typically involving large spreadsheets. Given the dozens of data points that may be associated with a single company, these hierarchical and intersectional data points can be very difficult to incorporate across a book of business, let alone act upon with any confidence.
Managing the sheer volume of ESG data at scale is an enormous challenge. And while ESG data is not updated frequently, portfolios change daily -- meaning, data processing needs to be repeated almost daily. This is clearly an obstacle to the effective application of ESG factors in everyday decision making and reporting. According to a 2020 McKinsey & Co. commentary, “while 90 percent of companies report on sustainability, only 15 percent of investors can successfully integrate this information into their investment decisions.”[1]
However, there’s good news for SS&C Advent clients: that’s all about to change. On April 27, we announced an agreement with Morningstar Sustainalytics to incorporate its data directly into our portfolio management platforms for asset and wealth managers. Sustainalytics is well known in the market as a pioneer of ESG research, ratings and data, and became part of Morningstar in 2020. The company has more than 1,000 clients globally and is reportedly a primary source of ESG data for 18 of the top 20 US asset managers.
This integration will make the portfolio manager’s life a lot easier with respect to ESG in a number of ways. It provides firms with a consistent, systematic and efficient means of analyzing ESG composition within any portfolio or across their entire book of business using Sustainalytics’ sophisticated analytics. It enables managers to evaluate ESG-related risks at their total firm level all the way down the risks associated with individual issuers. It will enable firms to more easily develop and implement ESG-focused strategies, and to accommodate individual investor ESG preferences, while providing another lens through which portfolio management teams can analyze their portfolios.
Incorporating Sustainalytics data into SS&C Advent systems stands to save firms hours of labor in collecting, compiling and analyzing ESG data, while ensuring data integrity and dramatically reducing the risk of errors. It will enable investment teams to collaborate on the basis of reliable shared knowledge and generally accelerate the process from analysis to decisions to trading. Above all, it will enable firms to sharpen their ESG policies and better communicate their ESG decision-making process and rationale to clients.
For years, many investment firms have grappled with the challenge of applying ESG principles in their investment processes in a meaningful way in the face of overwhelming and often inconsistent research and data. Our partnership with Sustainalytics is a huge step toward making ESG data more manageable and actionable, and finally giving firms a way to tell their ESG story effectively. Look for the integration to become effective on the Advent Genesis platform and the Black Diamond® Wealth Platform in the second half of the year.
[1] “Why ESG is Here to Stay,” McKinsey & Co., May 26, 2020 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-esg-is-here-to-stay
