The number of investors who said data is the the biggest barrier to integrating environmental, social and governance factors has increased in the last two years according to the latest ESG Global Survey from BNP Paribas Securities Services.
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The custodian interviewed 347 institutional investors incorporating ESG strategies to monitor progress since the last survey two years ago. Like two years ago, data remains the biggest barrier ahead of costs, a lack of advanced analytical skills and the risk of greenwashing. Two thirds of investors said data is the biggest barrier, higher than 55% in the 2017 survey.
Florence Fontan, head of asset owners at BNP Paribas Securities Services, said at a media briefing today: “Practical integration has its challenges due to data and technology barriers, and deep ESG investment is still finding its feet. The next two years will be critical to achieving the right investment mix, technology and skills in place.”
Frank Roden, head of asset managers EMEA at BNP Paribas Securities Services said at the briefing that problems cited with data include inconsistent coverage across asset classes, conflicting ESG ratings and indices and the lack of forward looking scenario analysis.
“New fintech solutions are appearing,” added Roden. “One fintech uses natural language processing and machine learning to analyse research papers for their impact on the UN Sustainable Development Goals.”
He continued that data is evolving quickly as the industry collaborates and regulators look to set standards.
Andreas Feiner, founding partner at asset manager Arabesque, said in the report: “I believe data on sustainability is now viewed in a similar way to how financial data was treated around 75 years ago. This has resulted in a situation where some companies avoid disclosing some information that would potentially show them in a negative light.”
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More respondents, 46%, said social is the most difficult to integrate and analyse, compared to 41% two years ago.
“A lack of consensus in the industry surrounding what constitutes the ‘S’ makes it harder to incorporate into investment strategies compared to both the ‘E’ and ‘G’,” said the study. “As such, it often acts as an interaction point between these two elements.”
Florence Fontan, BNP Paribas Securities Services
Fontan said the environment has been the main focus but social will undergo the same evolution.
“Impact bonds have to extremely targetted and you have to find the right things to measure,” she added. “For example, do you want to finance increasing the number of women employees ?”
After companies have acquired the correct data, they still find it difficult to analyse this information in-house and apply their findings across a range of asset classes, funds and sectors.
“The plethora of data sources and sheer volume of metrics require a combination of big data approaches, quantitative modelling and ESG expertise,” said the study.
As a result, one-third of respondents also cited technology costs as a barrier to ESG integration, double the 16% in 2017.
Hans van Houwelingen, chief executive of fund manager Actiam, said in the report: “If you want to integrate ESG across all your assets, as we do within ACTIAM, you have to enrich the data, you have to add data yourself, and you have to combine various data sources. You have to do a lot of work to get a real time ESG view for investment managers within their portfolio management systems, as well as to report exposures and real-world impact to customers.”
Optimism
Despite the hurdles of data and technology costs, more than 90% of investors said at least one quarter of their funds will be allocated towards ESG by 2021.
Patrick Colle, BNP Paribas Securities Services
Patrick Colle, general manager of BNP Paribas Securities Services, said in the report: “A majority (78%) of respondents in our 2019 survey state that ESG is either playing a growing role or becoming integral to what they do as an organisation.”
More than half, 52%, of respondents ranked ‘improved long-term returns’ in their top three reasons for ESG investment. The majority, 60%, also expect their ESG portfolios to outperform over the next five years.
The study said there is a growing belief in the link between incorporating ESG into investment decision-making and better risk-adjusted returns which has been backed up by research. For example, the UN PRI’s ESG and alpha study in March last year found that ESG information offers an alpha advantage in equities portfolios across all regions.
