4 Reasons Why Funds Stumble Toward a Solid ESG Investment Process

The world continues to search for agreement on ESG taxonomy, frameworks, regulations, reporting, and scoring. Despite that, many funds are finding considerable alpha and inflows in the domain of impact investing.

Why Your ESG Investment Process Matters

Even if you’re of the mind that ESG is more of an obligation than an alpha-driven opportunity, fund managers are increasingly on the hook with investors to make intelligent, sustainable investments. Whether they like it or not, these questions are likely here to stay.

Questions that were once as simple as, “Do you have an ESG policy in place?” have become more probing. The latest DDQ template from PRI suggests investors ask funds more pointed questions, like:

• How have you … ?
• Are you actively … ?
• When did you last … ?

Investors want proof of engagement and impact. They are hungry for a cohesive story around their investments — regardless of how fragmented the landscape is.

In this article, I’ll share a few of the growth areas we’ve identified at Verity as we help our customers adapt to this new era of investing.

ESG Process Problem: Inconsistent ESG Data Capture

One of the biggest challenges funds face is capturing the ESG data in the first place. The solution starts with integrating ESG into the daily work of analysts.

Analysts know the companies the most. They’re more intimately familiar with the companies, sectors, and competitors than anyone else — yes, even ESG officers, etc. — in the fund.

Also keep in mind that you need to be future-proofing the data you collect now for the data you need in the future. The fastest, most consistent, and most exacting path is through the analysts.

>Make ESG Easy for Analysts

Regulations. Investor queries. Reputational damage from bad headlines. These are motivators for fund partners, portfolio managers, and compliance officers, but they are not necessarily top of mind for the average analyst. ESG, frankly, is new to many — and still evolving for the rest of us. The average day of an analyst is hectic at best. Combined, these circumstances create a challenging environment for developing new habits, practices, and processes. It’s paramount data capture not be burdensome to analysts.

It’s with this feedback from customers that we continue to make ESG data capture as simple and intuitive as possible in VerityESG, our standalone ESG engagement tracker, as well as RMS. Features like Office add-ins and in-app templates take steps out of a cumbersome process and remove inconsistency and uncertainty around data capture.

Fewer extra steps. Office add-ins and templates streamline data capture.

ESG Process Problem: Spreadsheets

Spreadsheets have their purposes. But, for ESG reporting, they are a less-than-scalable solution. Nor are they particularly competitive. ESG reporting requires a level of automation that most fund managers aren’t prepared for yet. Likewise, ESG data should be part of the investment process, not siloed off.

>Adapt With Automation

Many funds are using a modern research management system to systematically implement standard practices and signoffs so they can easily provide disclosures and reports around ESG-based investments. Keep in mind that automation requires a certain level of process maturity and stability. You’ll need to have workflows in place before experiencing the full value of automation.

>Integrate Into the Portfolio

When you bring ESG and engagement data together you can make investor and regulatory reporting more effective and automated. It’s why we’ve worked with funds to develop another instrumental ESG transformation: an engagement tracker that empowers funds with an integrated view into what’s been done and where.

More and more, investors want to know about the real-world impact of their investments— not just that financial risk was mitigated. Tracking engagement helps get you there.

The ESG engagement tracker in VerityESG.

With Verity, funds can report by portfolio(s), by indicator(s), timeframes, any datapoints relevant to their engagement reporting.  Likewise, teams can view individual engagement ‘stories’ and track the entire engagement lifecycle — from objective to meeting to proxy to outcome — all in one place.

ESG Process Problem: Patchworked Reporting 

Answering investor questions around engagement or similar can become a forensic dive into a mess of data. The frequency of change around frameworks and requirements can make reporting even murkier. One of the core challenges for many funds is pulling all this together to tell a cohesive story without a herculean effort.

>Align to Goals

We’re seeing success and efficiency when funds are aligning portfolios, investment ideas to particular goals from the beginning — whether U.N. sustainability & development goals (SDGs) or goals specific to a region or sector. With alignment across the fund, it becomes much easier to provide investors and regulators with the information they need, even as requirements evolve.

ESG Process Problem: Too Few or Inadequate Data Inputs 

The time is nearly up for funds that are evaluating sustainability purely on external scores from 3rd party sources. While taken together with internal research, these sources are instrumental in developing a sense of a company’s ESG footprint, leading funds are adopting a more holistic, bottoms-up approach to improve coverage and diminish risk.   

>Use Only the Data That Matters

There is a lot of data available. And funds need a lot of it. In fact, for many, data issues remain a barrier to more effective ESG integration.

One strategy our more ESG-mature customers implement is to be very selective about the data sources they do use and when. They’re giving priority to data with the fewest inherent estimations as well as data that is specific and relevant to different sectors and/or peer groups. The result is they are able to measure like with like and bring contextual intelligence to their strategies.

>Aggregate & Centralize the Data

Again, if you want to bring the story together, you need to bring the data together. It’s a driving reason for many funds as they engage with Verity to transform the processes for ESG and sustainable investing. They can pipe data in together so teams can access, use, and share it.

Funds are consolidating data inputs to reduce legwork.

Bottom Line 

Funds that have waited on the sidelines should prepare to jump in. These themes are not going anywhere.

Incorporating ESG adds a layer to research management and investment processes that involves establishing frameworks, scoring mechanisms, approval processes, and handoffs to different parties in the firm, all while tracking the work in its various stages.

That said, funds are finding ways to transform and adapt without frustrating their teams and processes. At Verity, we’re doing everything we can to help customers turn the corner.

Start Making Headway With Your ESG Investment Process

Verity offers a purpose-built ESG engagement trackers that helps funds capture data, track the full engagement lifecycle, and streamline compliance and reporting.

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