Research Reports » The Fund Oversight Challenge Report

ESG and the data challenge

ESG_dataData has become a primary driver of technology development for asset management. Over the past few years, there has been the realisation among market participants that data is no longer an outcome but a valuable commodity in its own right. Consequently, firms are searching further and wider for data and for multiple purposes – not just compliance but for investor reporting, for product development, for operational alpha and more.

This is borne out in our survey. Our study (figure 10) shows that almost half (47%) of firms use four or more external sources for their data, be that standing data, market data, pricing data or ESG. A very small number (6%) use just a single source. While the predominant use of vendor data is a welcome development in terms of data governance, it does create some operational issues, as will become evident in later questions in the survey. These issues concern aggregating that data, ensuring consistency and managing the processing of that data.

Sources_of_vendor_dataThese data management issues have become especially critical in ESG [environmental, social and governance] investing, where the lack of standardised data has become a critical cause of concern. It makes it harder for investors to accurately assess ESG fund performance and to compare funds. This challenge may affect the credibility of the burgeoning ESG sector, especially if it allows for so-called ‘greenwashing’ whereby fund managers are unable to substantiate the ESG claims they are making.

The EU’s Sustainable Finance Disclosure Regulation (SFDR) was implemented earlier this year, partly in response to the unstandardised data issue. The aim was to establish a standard taxonomy, increase transparency and thereby avoid greenwashing.

The SFDR calls on asset managers to classify their funds according to three primary categories – article 6, which makes no claims of sustainability, or articles 8 and 9, which both claim ESG credentials. Firms are then required to provide data to support these claims.

However, while it is a welcome step in the right direction, the legislation is far from perfect in the eyes of many in the industry.

“[The SFDR] comes with many challenges,” says Giorgio Botta, regulatory policy advisor at the European Fund and Asset Management Association (Efama). “You have the clear benefits for investors, but it also creates more administrative burdens – it’s expensive, it takes time, it takes data. You cannot fight greenwashing with estimates or gestures – you need data.”

Efama is also concerned about inconsistent reporting standards and the cost of data, to the extent that it has called for a transition period for taxonomy-related disclosures in the SFDR.

The impact of the SFDR is not limited to Europe. Any US manager that wants to market their funds in Europe will have meet the regulation’s requirements. And while the EU may be the first region to act, it is inevitable that other jurisdictions will follow. The UK, having left the EU, is planning its own rules on ESG disclosure, as is the US.

The Securities and Exchange Commission (SEC) has said that its examination of the ESG sector has uncovered shortcomings in the way that investment managers and advisers have built, pitched and monitored their ESG funds. While it has not yet passed any regulation on the subject, it has issued guidance at various times, advising that investors in ESG funds understand what they are investing in.

Guidance issued in February 2021 noted the data challenges around ESG funds: “There is no SEC ‘rating’ or ‘score’ of E, S, and G that can be applied across a broad range of companies, and while many different private ratings based on different ESG factors exist, they often differ significantly from each other.”

The SEC also notes that some ESG fund managers may use data from third-party providers. “Some of the data used to compile third-party ESG scores and ratings may be subjective. Other data may be objective in principle, but are not verified or reliable,” it states.