VIDEO | Data – the regulators call for it, and investors are making decisions based on it. We have entered a data-centric era, but can the current quality of data carry the burden of expectations put on it? In the session titled “The ESG data conundrum for asset managers” at the PostTrade 360° Nordic 2024 conference, five experts took to the stage to dissect the issue.

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“The big challenge with regulation over the past couple of years, and will continue to be looking forward, is that asset managers are asked to report on things for which there is no data,” said Cecilia Cisana, senior vice president of client solutions, Morningstar Sustainalytics.

This creates a “vicious circle”, where “if you don’t have the data, you can’t report on it”, observed Valeria Dinershteyn, director of sustainable investing client engagement, EMEA, at Northern Trust Asset Management.

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Nevertheless, she sees regulation as a necessary evil. “When I’m asked whether regulation is a headwind or a tailwind for the industry because you either hate it or love it, I do really want to believe that it’s more of a turbulence. It’s going to shake us up, it’s going to separate some really weak and unsubstantiated approaches, and it’s going to help us to get to a place that is more thoughtful. But we to get through the turbulence. I don’t think there’s a way around it.”

She suggested that a change in perspective could be the solution. Instead of seeing the lack of data as a loop that’s hard to get out of, asset managers could take the opportunity to engage with companies to get the information they want. Taken a step further, this could even become an opportunity to create data standards. “We can, as an investment community, be a more unified voice. We can ask companies for the same things.”

It’s not that simple

The panel was unanimous in their assessment of the data gap in biodiveristy risk as one of the biggest and most challenging to manage. The issue lies in the history of ESG data and “what we tend to look at”, pointed out John Erikmats, sustainable investment integration lead at SEB Asset Management. “We tend to look at companies, while biodiversity is an ecosystem interation with the financial system. It’s much more complex to model.” Its measurement isn’t just about looking at the mother company, but requires looking at “the supplier of the supplier of the supplier”. Without a complex map of supply chains, it is difficult to adequately capture all the risks.

ESG scores simplify complex problems. But this feature, which has made them popular, is also their biggest flaw. Didier Haenecour, head of sustainability product management at Euroclear described ESG scores as attempting to do “what credit ratings are doing for assesing the risk of default of an issuer”. Yet, it’s not comparable, because credit ratings “look at default probablities based on decades of data” – which is not achievable in ESG scores. “The score is an aggregation – an average of an everage of an average,” he said. “It becomes, to me, meaningless for a buy-side portfolio… They are quick and dirty, and it’s not easy for anyone.”

The bigger picture

Instead of credit ratings, Dinershteyn believes a better comparison to be brokerage ratings for fixed income securities. “You don’t have to take it at face value; you don’t have to trust it blindly – that would make you a really bad investor, or a myopic investor, to say the least. But there is something to be said for having them within different parts of your investment process.”

For Erikmats, the key is to always look at the raw data behind the scores. “Data always needs a context,” he reminded the audience. “If you use data straight off the bat, you will be wrong. Data doesn’t lie, but the people using it do.” It is therefore important to consider the context before building a good model.

The lack of quality in ESG data has given rise to a double standard that he finds frustrating. “I’m very sick of sustainability data being treated differently from financial data,” he admitted. “No one would accept investing on the same quality of financial data.” Yet, asset managers are expected to be “one of the drivers in the transition and price risks on quite bad data”.

On the bright side

Amid the criticisms, Therese Niklasson, global head of sustainable investment at Newton Investment Management (BNY IM) reminded the panel to put themselves in the corporations’ shoes. “We have to be mindful of what we are asking of companies. It’s extraordinarily burdensome for some smaller companies to have to produce this plethora of data.”

The journey to good ESG data will not be an easy one, but it could benefit from a healthy pinch of optimism. “We have much more data today. We have better quality of data, a greater variety of data… and we’re starting to get some standardisation of data,” she said. “The last five years probably have had the same amount of developments that we saw over the 15 years prior.”

Panelists:
John Erikmats, Sustainable Investment Integration Lead, SEB Asset Management
Therese Niklasson, Global Head of Sustainable Investment, Newton Investment Management (BNY IM)
Valeria Dinershteyn, Director of Sustainable Investing Client Engagement, EMEA, Northern Trust Asset Management
Didier Haenecour, Head of Sustainability Product Management, Euroclear

Moderator: Cecilia Cisana, Senior Vice President, Client Solutions, Morningstar Sustainalytics


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