asset managers seize on opportunities amid the rapid growth of ESG, a surprising challenge is becoming the biggest obstacle for many firms: data management.

According to BNP Paribas’ ESG Global Survey 2021[1], as interest in ESG among institutional investors continues to accelerate, data remains the primary barrier for asset managers to integrate ESG strategies with 59% of survey participants indicating data issues are a top-two impediment to ESG integration. Similarly, in a recent study by bfinance, 84% of global institutional investors indicated “a lack of consistent and standardized environmental, social and governance information from money managers” as a challenge.[2]

The explanation for this is easy but the solution is complex. To begin, there are nearly a dozen ESG frameworks from different regulatory bodies globally, such as the notable Social & Human Capital Protocol, and the industry is currently in the process of adopting upwards of 57 written guidelines for ESG – each with dozens of dimensions and criteria. Among these guidelines, the most widely adopted are from the Sustainability Accounting Standards Board (SASB) and Principles for Responsible Investment (PRI).

Using the Sustainable Finance Disclosure Regulation (SFDR) as an example, asset managers will be required to break out how they consider Principal Adverse Impacts beginning July 1st, 2022. This can include nine indicators related to climate and environment, and five indicators on social and employee issues, human rights, anti-corruption, and anti-bribery matters. In addition, there are another 16 environmental and 24 social indicators that are optional.[3]

Whether choosing ESG investing, socially responsible investing, or impact investing, managers need to create their own set of measures based on the nature of investing they are executing and classify them based on regions and sectors. With this need, IVP has created a sample framework of mandatory and voluntary reporting indicators as a starting point. Below is an illustration of the IVP framework for SFDR.

Add to this that there is a growing list of data vendors from traditional index companies and data providers like Bloomberg and MSCI, as well as specialty firms like Sustainalytics and RepRisk. However, it’s not the number of vendors alone driving the complexity, it’s also the lack of consistency for definitions and reporting standards across vendors – a challenge that the industry is working to solve.

The Organization for Economic Cooperation and Development (OECD) recently assessed different rating providers such as Bloomberg, MSCI, and Refinitiv and showed significant differences between ESG scores and ratings for the same company.[4] Tesla is a popular example to illustrate this problem.

As the Financial Times reported in May 2020, “The electric carmaker is rated in the bottom 10 percent of all companies by one rating agency (JUST Capital) but receives an ‘A’ grade from another (MSCI). It is easy to see how investors looking at this might be left scratching their heads. But, conversely, many people in the sustainable investing market argue that having this kind of access to a variety of opinions from different experts can be a good thing and help them make better-informed decisions.”[5]

Leading managers are meeting this challenge by creating their own internal guidelines and standards for identifying pertinent data and using a comprehensive data management framework to master their ESG data. To do this successfully we would argue managers need best practices and intense data management solutions that include certain characteristics such as:

  • Ability to integrate data dictionaries seamlessly
  • Issuer Master capability with the ability to structure hierarchical linkages across companies
  • Modules to consistently deconstruct standardized guidelines like SASB and UNPRI
  • Exposure, P&L, and performance attribution framework for stratifying measures across ESG dimensions
  • Analytics capable of normalizing vast, diverse data into user-friendly data sets and visualizations

IVP offers an ESG Center of Excellence designed to help asset managers establish a reliable framework for ESG investing that supports accurate and efficient portfolio construction, asset allocation, risk management and compliance, and regulatory reporting.

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[1] Shanny Basar, “ESG Data Primary Barrier to Integration,” Markets Media, September 13, 2021.

[2] Paulina Pielichata, “Lack of consistent ESG data a big challenge for investors – survey,” Pensions & Investments, February 8, 2021.

[3] “Explaining the European Union Sustainable Finance Disclosure Regulation (EU SFDR),” J.P. Morgan Asset Management, June 30, 2021.

[4] Jennifer Laidlaw, “Lack of standardized ESG data may hide material risks, OECD says,” S&P Global Market Intelligence, October 2, 2020.

[5] Billy Nauman, “Fund managers struggle to compare ESG apples with oranges,” Financial Times, May 11, 2020.