The use of ESG data in the Investment Management industry has come a long way. It is now one of the main components in many investment decisions as well as for the engagement with the companies invested in through its investment portfolios.
High profile discussions, debate and activism around the impact of global warming on our environment has brought the importance and power of ESG investing even more to the forefront. With this comes an extraordinary paradigm shift in which the driver behind environmental change is not government but the investor (with the investment industry representing the investor).
A fast growing sector
The industry is ramping up its promotion of ESG data as a meaningful input to generating financial returns for our investors and, by default, asking the investor to also rely on that data in the reporting and disclosures to them. Yet, many consumers of data (including investment decision makers) within the investment management industry are unaware of the importance a good data governance framework provides in delivering reliable, accurate and fit-for-purpose inputs across investment and operational processes.
This awareness gap is exacerbated for ESG data because it is less evolved than, say, capital market data sources (i.e. accounting data, securities attributes, pricing, volatility measures, etc.) and is generally more subjective or proprietary in form.
The rate of adoption of ESG data across the industry without due consideration for its nature, how and when it is derived, what methodologies might be used to produce it, and how it will be used within a firms’ investment process and disclosures, has the potential to create unintended risks for investment firms.
It should therefore be afforded the same level of governance rigour given to other major inputs to the investment process and accompanying services. Specifically, any firm producing its own proprietary ESG scores and frameworks needs to exhibit appropriate transparency and oversight to avoid the reality or perception of gaming scores for strategies with higher fees.
A new framework
The recently published paper ESG Data Integration: Important considerations for Investment and Wealth firms creates some insight in not only the associated risk of the use of ESG data but equally some guidance as to how an ESG data governance framework can be set up.
We can only hope that such a governance framework gets the equal attention as the good that is aimed to be achieved with the use of ESG data in investment decision and the engagement with companies invested in. If good ESG data governance is not achieved then all the good intention to change the world for the better might end up with very disillusioned investors.