A new study from the independent sustainability research firm Verdantix with senior executives of buy-side investors who collectively manage $1 trillion in assets, reveals 58% identify climate change risk analytics as their ESG investment priority as they look to help future proof their portfolios. Just over one in four (27%) say their priority ESG financial solution is ESG scores for investment decisions, followed by 12% who say it is ESG ratings for credit. Just 4% identify ESG indexes for benchmarking as their top ESG investment priority.
However, the study found buy-side investors are very concerned about the quality of ESG data available to them. With regards to geo-spatial data solutions, which describe objects, events, or other features with a location on or near the surface of the earth, just 30% of survey respondents say the quality is very high, and 47% say it is low or very low.
In relation to sentiment monitoring, which leverages natural language processes and machine learning to determine the sentiment of investible assets, only 3% describe the quality of current market offerings as very high or high.
Only one in four respondents (26%) say the quality of ESG data from credit rating agencies is very high or high.
Kim Knickle, Research Director, Verdantix said: “In order for buy-side firms to successfully integrate an ESG strategy into their investment process, technology solutions need to be leveraged. To successfully analyse ESG data across the investment portfolio requires sophisticated enterprise data management. Two thirds of survey respondents highlight an enterprise data management for ESG as either very significant or significant to meeting their ESG needs in the next two years. Additionally, funds seek a holistic ESG portfolio management solution with 40% of survey respondents noting this technology to be very significant to meet the ESG needs of their funds over the next two years.
“A key challenge highlighted by our research is that data outputs from ESG vendors are perceived in the investor market to have varying levels of validity. There is clear demand for better quality data, increased transparency around methodologies used, and a greater degree of standardisation.”
Verdantix’s survey found the ESG strategic setting within buy side investors is being led by or directly influenced by the Chief Investment Officer, according to 88% of survey respondents. The corresponding figure for Heads of Sustainability is 74%, followed by 54% who said this about their Chief Risk Officers.
When it comes to ESG strategies adopted by the buy-side investors interviewed, 90% say they have ESG integration strategies for their investment decisions, 70% openly engage with the companies they invest in, 67% apply exclusionary screening, and 60% use positive screening.
Knickle said: “Five years ago, ESG investing was typically done through an exclusionary screen to remove firms or sectors from an investment portfolio based on business activities or practices. Fast forward to today and it consists of numerous strategies such as using ESG as a factor within quantitative trading. The rise in ESG investing can be attributed to a plethora of factors, including the establishment of the view that a strong ESG performance of an equity decreases the risk of investment and changing investor preferences to have a positive societal impact.
“However, our study shows that ESG and sustainability consulting firms have much work to do to meet the very challenging demands of buy-side firms.”