MIFIDii.and.ESG

The focus on ESG has grown apace, driven by increased social conscience and a collective move towards more sustainable options.This has resulted in an explosion in ESG data and a demand for ESG ratings for board, investor, lender, consumer and other stakeholder decision making. The development and implementation of robust regulatory frameworks are following close behind.

Thomas Russell, Sept 10, 2020

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The focus on ESG has grown apace, driven by increased social conscience and a collective move towards more sustainable options.

This has resulted in an explosion in ESG data and a demand for ESG ratings for board, investor, lender, consumer and other stakeholder decision making. The development and implementation of robust regulatory frameworks are following close behind.

Therefore, as part of its action plan on ESG, the EU published draft delegated acts on suitability assessments that would amend existing Level 2 measures under MiFID2.

The Commission's proposals reflect the recommendation set out in the Final Report of the High Level Expert Group that investment advisers should ask about, and then respond to, investors’ preferences regarding the sustainable impact of their investments, as a routine component of financial advice. This would involve clarifying an investor’s ESG preferences by means of a questionnaire.

The proposals also take into account ESMA’s Final Report on integrating sustainability risks and factors in MiFID2 (April 2019).

Investment advisers who thus far have resisted ESG investing will now have to start taking it into consideration, and if, post-Brexit, the UK’s financial regulation remains aligned with EU regulations, then the impact of the new regulations will also apply to UK advisers.

Additionally, transparency clauses will mean that advisers will need to include the extent to which sustainability risks are integrated into investment decisions and an assessment of the likely impacts of sustainability risk on client returns. So, even if none of their clients are interested in ESG, advisers will still need to demonstrate knowledge of ESG and a process that shows how ESG funds are identified, evaluated, selected and compared.

Research from Square Mile Investment Consulting and Research indicates that advisers feel that asset managers could do more to support their understanding of ESG by improving clarity of their materials and processes.

However, in our experience, whilst ESG has afforded the opportunity for asset managers to reach new investors, to develop new revenue streams, to bid for institutional pools of money from charities and public sector pension funds and to connect with millennial investors it has brought a set of unique challenges.

ESG ratings and benchmarks have experienced a rapid expansion, and with this an extraordinary degree of fragmentation. The World Business Council for Sustainable Development (WBCSD) reports that there are over 2,000 individual ESG reporting indicators requested by the approximately 600 ratings and benchmarks.

On top of the fragmentation issue there is the question of definition. Without a consistent definition of what ESG ratings are supposed to measure or even a consistent view of what constitutes a relevant ESG issue, it is difficult to gauge their effectiveness.

Asset managers may find themselves; managing the demands of investors for more frequent and granular ESG data; sifting through the overwhelming volume of ESG market data, metrics and risk profiles; and supporting (prospective) portfolio companies who often lack the resources and know-how to develop their ESG risk profiles.

The cost burden is significant.

Some asset managers try to solve the problem by focusing on the outputs - reports, benchmarks and metrics. In our experience, the focus is better directed upstream, to redefine the data flow, using our award-winning data tool Gather 360.

With Gather 360, the ESG analyst specifies the data that they need and their desired format, then submits data requests to data sources and providers, internal and external. Gather 360 enables the data-return to be tested against specification at source, identifying errors and anomalies for correction.

Gather 360 enriches the ESG data and formats it ready for reporting or analysis. Gather 360 also automates the collection process, providing an audit trail against each line of data as well as certified provenance.

Gather 360’s proprietary approach has transformed how ESG data quality is managed and governed, providing a transparent and proven process for asset managers and advisers alike, and slashing ESG data spend.

  • Change how ESG data is requested and you change the quality of ESG data received.
  • Enable ESG data suppliers, internal and external, to test and correct the data before its provided and you slash the time and cost of checking and cross-referencing.
  • Wrap these activities in easy to use smart, secure technology that orchestrates and governs the key activities and you enable the development of a high-quality data layer with data provenance embedded.

Using Gather 360, asset managers can;

  • Ensure that the ESG data shared with advisers, investors and the market is appropriate, statistically accurate and granular.
  • Create proprietary ESG reporting frameworks for portfolio companies, which in turn will improve company ESG market ratings and risk profiles.
  • Create proprietary ESG ratings indices.
  • Enhance their own ESG profiles to win more Institutional business
  • Monetise their ESG data

Gather 360 has been designed for the business user, not the IT team. It's an intuitive, secure, cloud-based tool that integrates easily with existing data systems and legacy infrastructures.

A free, fully supported trial account is available to help clients to understand the benefits and opportunities that Gather 360 offers. Click here to set up your trial account.

For more information on ESG data, join our Gather 360 e-seminar on ‘The ESG Data Quest’ on Thursday 8th October 2020, 14.00 Dublin.

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