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The incorporation of environmental, social and governance (ESG)
factors into the investment process is one of the hottest trends of
recent years. However, standardization and regulation of ESG have
not kept pace.
ESG standards have typically been set by non-governmental
organizations (NGOs) and industry associations, with no single,
accepted framework for evaluating and comparing assets. The
industry has also relied on often opaque scoring mechanisms to
assess the ESG credentials of assets.
This lack of consistency and transparency has diluted the
trustworthiness of ESG as a category, leading to accusations of
'greenwashing' in some quarters. However, the tide is starting to
turn, as regulators focus more on ESG.
In Europe, the European Securities and Markets Authority (ESMA)
is prescribing standardized ESG disclosure and investment
practices. Meanwhile in the US, the Securities and Exchange
Commission (SEC) has published initial guidance aimed at improving
transparency for investors and credibility for the industry. For
example, it has proposed that asset managers should document the
processes used to generate scores, perform proxy voting and notify
the board of any disagreement with a decision.
The development of these more prescriptive disclosure
requirements raises questions about the way financial firms
collect, aggregate and contextualize their ESG data. Firms will
need the flexibility to roll data up to present the big picture;
break it down to show how the evaluation was calculated; and set
rules about what to include and exclude in their scoring. Above all
else, they will need to be able to annotate specific data points
and ensure that the notations track through to any report in which
the data is cited.
Given the wide range of ESG metrics required to meet the
requirements of regulators and investors, there is a growing need
to collect and manage the data using a strategic data management
and warehousing solution. This allows asset managers to aggregate
data from a range of sources and link these metrics with related
investments and financial entities, as well as integrating ESG
factors into their current and historical portfolio reports.
Critically, to keep up with increased regulatory scrutiny, firms
need flexible disclosure functionality that enables them to append
notes to data and create disclosure statements that can be
automatically presented to external parties. This is what we offer
with EDM
Warehouse, our buy-side reporting solution. We give users that
ability to bind notes to their data so that if they run multiple
reports, a correct and complete set of disclosures will appear in
every version. This allows users to define, set and modify rules
about what to include or exclude in disclosures and specify the
inquiries, accounts, funds and instruments in which they need to
appear.
As more robust and granular ESG reporting methodologies are
rolled out, the ability to manage and contextualize the underlying
data will become a critical capability. Leveraging a strategic data
management and warehousing platform with integrated disclosure
management will help financial firms keep up with rapidly evolving
regulatory and investor expectations.
Find out how we are helping financial firms manage their ESG
data here.
Read our ESG data management client case study about
Mirabaud Asset Management
here.