Data Standardization Remains Top ESG Roadblock

“Data remains the number one barrier,” to adopting strong environmental, social, governance (ESG) portfolios, says Florence Fontan, head of asset owners at BNP Paribas Securities Services.

Based on the recent ESG Global Survey 2019 conducted by BNP Paribas Securities Services, which includes responses from over 347 asset managers and asset owners with assets under management ranging from $1 billion to over $25 billion, two-thirds of respondents cited data as one of the biggest challenges in the space. Over the years, the problems have shifted from the amount of data available to the quality and consistency of data on offer from various providers.

As it stands, asset managers have to acquire data from multiple sources and third parties to make better-informed trading decisions on ESG investments. This is increasingly problematic when trying to aggregate or extract value from large amounts of data from various sources lacking in consistency or standardization.

Technology and outsourcing costs also make ESG adoption challenging, as asset managers struggle to determine where to invest their resources. And the technology landscape has yet to mature, given the lack of advanced analytical tools or quantitative models available to provide a holistic view of the ESG landscape. According to the BNP Paribas study, asset managers require an industry-wide methodology for analyzing ESG, where data sources can be compared and weighted based on their value.  

Frank Roden, head of asset managers for EMEA and head of UK investors at BNP Paribas Securities Services, explained at a BNP Paribas panel discussion on April 9 in London that although the ESG space has seen exponential growth in the number of third-party data providers, there is a long way to go when it comes to extracting real value from the data available.

“The data quality across all of the [ESG] asset classes is not necessarily consistent. You have different indices and rating standards and in some cases they are conflicting. You have the actual cost of investing in technology and understanding not only the technology but how to analyze the data you receive—because of course you also want to use these types of ESG factors to be forward-looking, but there is still a lack of forward-looking scenario analysis,” said Roden.

Another growing issue is the lack of education and skills around understanding and taking advantage of emerging asset classes. As asset managers and buy-side firms are looking to embed ESG principles, they are having to introduce fresh talent from other industries or disciplines to help train existing teams within financial institutions. This might involve hiring recent graduates with education in ESG subject areas or plucking expertise from other firms outside the industry. 

Fontan explained that the survey results show a shift in how asset managers approach obtaining talent, with some looking to broaden the scope of their teams’ skills by hiring individuals from non-traditional places, such as non-governmental organizations.

The Role of the Custodian

Historically, the role of a custodian has been to ensure the security and safety of assets. Some say this has evolved to the extent that they now act as custodians of their clients’ data. According to Farah Docrat, product sales specialist at BNP Paribas Securities Services, this can be taken one step further by providing advanced analytics and metrics based on internal inflows from asset managers combined with data from selected third party providers.

The idea is that custodians and asset servicers are in a position to aggregate the data from various portfolios and provide metrics based on sustainability risk, exposure, ESG performance, and forecasting analytics. BNP Paribas and other custodians also use a consistent methodology for creating analytics around the data gathered from the trade lifecycle or third-party providers. BNP Paribas collects the data from ESG rating agencies and data providers and compares that with investment portfolios to provide a weighted score or benchmark on its sustainability risk.

“Through our tools you can see that the ESG rating of your portfolio is, let’s say, 80, but the benchmark is 90. You can then see where the score of your portfolio is being dragged down and literally go in and drill through all of the consolidation layers into the underlying stock contributions to see where that difference is coming from,” explains Docrat.

BNP Paribas Securities Services was the first global custodian to sign up to the Principles for Responsible Investment (PRI), a global sustainable investments framework, in 2016. Since then, it has developed reporting tools for ESG investments, later building customized analytics.,The securities services arm is collating its analytics capabilities and packaging them to roll out over the next 12 to 18 months