With the push for sustainability so strong from both consumers of products and services, as well as governing bodies globally, a majority of companies are actively transforming to become sustainable. There is an increased focus on improving Environmental, Social, and Governance (ESG) ratings and achieving Sustainable Development Goals (SDG) set by the United Nations.
In addition to analyzing news reports, income statements, and balance sheets, investors must now consider a company’s current sustainability rating and future initiatives, to make the right decision. Analysts and Portfolio Managers need to ensure that their funds meet a set of criteria and rules pertaining to sustainability.
Sustainable investing through the eyes of an investor
Sustainable investing and ESG can mean different things to different people. For Portfolio Managers and Analysts, it is important to understand sustainable investing from the standpoint of investors. This can be broadly classified into three themes:
- Integration: “I believe that incorporating ESG may improve my investment results”.
Growing research suggests that ESG factors have contributed to long-term financial performance. ESG factors can be used to identify better-managed companies or to flag companies with business models that are likely to face scrutiny.
- Ethical values: “My investments should reflect my values”. Some investors consider ESG issues a means to align investments with their ethical, religious or political beliefs and look to exclude activities like tobacco, weapons, alcohol and gambling from their investment universe.
- Positive impact: “I want my investments to make a difference in the world”. These investors focus on the impact of their investments on the world around them. They seek to direct their capital toward companies that provide solutions to environmental or social challenges and monitor the positive impacts of their investments alongside their financial returns, through formal frameworks such as the UN SDGs.
Challenges faced by the industry
Asset management companies are seeing a lot of value in sustainability investment and the way in which it can impact their portfolios and fund. This has resulted in the rapid pace of acceleration of investment and financing into sustainability. However, without the right tools, methodology, and approach, companies may fall short of reaping the full benefit of their sustainable investment initiatives.
Key challenges include:
- Huge volumes of data, stored in multiple formats: ESG data providers, such as Sustainalytics and MSCI, provide various forms of ESG ratings that are considered key to investment decisioning. A fundamental issue for organizations looking to improve their sustainable investment offerings is how to collate this data and represent it in a way to make quick and efficient sustainable investment decisions. For example, an investor may only invest in companies with MSCI ESG ratings of BBB or above.
- Lack of investment fund rules logic and application: Some investors may not want to invest in organizations affiliated with certain types of business. For example, only investing in companies with zero links to military, but accepting companies with a revenue less than 10% made from tobacco production. There is data available to provide this information such as ISS Ethix, however, this combined with ESG data must be ingested and portfolio rules and criteria must be applied to drive investment decisioning – a requirement which financial institutions struggle to meet.
- Manual intensive methods: Portfolio managers need to document and leverage conversations that they have with companies regarding sustainable goals and related performance monitoring for better investment decisions. Investors also need the ability to forecast performance to determine whether a company could be a viable option for future investment should they improve their sustainable performance. These activities are conducted manually with little integration to an investment platform to view notes and track company progression. Portfolio managers and analysts are not equipped with the right tools which leads to an increase in manual processing and longer working hours.
The solution lies in a sustainable investment platform
With the demand for sustainable investments growing, change is required, and this is where a sustainable investment platform can improve ways of working.
To do this, it is important to first understand where financial institutions are on this journey. A few are maybe at entry level looking to begin their journey into sustainable investment. Others may have already begun this journey, but are working with inefficient and highly manual processes that prevent the generation of required outputs. The first step, therefore, is to identify exactly where you are on this journey. This can be determined by analysing current state processes, identifying bottlenecks, and agreeing to future-state prospect.
By implementing a platform that collates all key data points into a single, simple, and interactive view and applying customized rules and criteria to this data, businesses can leverage a user-friendly method that incentivizes investment in a sustainable future. In turn, this provides Asset Managers with all required tools available to drive sustainability, changing the way investment decisions are made, allowing for financial institutions to become global leaders in sustainable investment.