“The importance of data quality is really going up dramatically,” stated Stephan Leithner, Deutsche Börse executive board member, during his keynote. Deutsche Börse acquired Luxembourg-based fund data manager Kneip earlier this year, which will help the company build a “golden data hub” that will centralise and process data, he argued.
“The asset management industry has an enormous amount of data that is everyday increasing. And at the same time, there are multiple sources,” Leithner said during the conference on Wednesday. “So that creates naturally a challenge around having the right quality, and that is most exemplified around ESG.”
“There are numerous challenges to be dealt with,” said Magdalena Kuper, head of sustainability at the German investment funds association BVI, during a panel on ESG and technology. These challenges include unclear regulatory concepts relevant to the implementation of the Sustainable Finance Disclosure Regulation, a lack of clarity of what “sustainable” investments actually mean, what determines a positive contribution to an environmental or social objective, and what requirements must be met for the “no significant harm” assessment.
Another major challenge relates to the lack of reliable and comparable ESG data.
There’s also uncertainty surrounding the classification of Article 9 products, added Kuper. According to the SFDR, an Article 9 fund has a sustainable investment or a reduction in carbon emissions as its objective. “We currently see in the market major reshuffling of products that have been initially assigned to Article 9 stages back to Article 8. And this seems to be mostly related to the persisting uncertainty about what level of commitment in terms of sustainable investment needs to be made in an Article 9 product.”
“Another major challenge relates to the lack of reliable and comparable ESG data,” continued Kuper. This is a particularly relevant challenge with regards to taxonomy disclosures. “There’s also major uncertainty as to which data that is available to the market actually meets these requirements.”
Elisa Alonso Sanz, chief operating officer at ABN AMRO Investment Solutions and a speaker on a panel dedicated to the future of fund data, echoed this view. “In Europe, we have different regulators with different demands. Of course, taxonomy regulations are deployed all over Europe, but we really need to have a common denominator across ESG data because otherwise, we are comparing pears and apples.” Knowing regulators’ requirements around ESG data is important.
The need for standardisation
“The Esma [European Securities and Markets Authority] consultation published last week concerns the use of ESG or sustainability-related terms in the fund name,” mentioned Kuper. “It touches really upon marketing of products by using ESG-related terms in the fund name.” What is seen now is that national authorities take different approaches towards authorising funds that use ESG, green or impact-related terms in their funds. “It would be very helpful to have a clear approach at the European level in order to end this fragmentation.”
Esma is now discussing a “certain minimum proportion”--50%--of sustainable investments that would allow a fund to use the term “sustainable” in their name. However, it still isn’t clear what a sustainable investment actually is, or how realistic it is for a fund to attain this proportion. “This is something that needs to be first sorted out by the [European] Commission. Then as a subsequent step, we can assess whether or not we can have this threshold of 50%, and whether or not it’s realistic.”
Beware of risks related to greenwashing
The moderator of the ESG and technology panel, Kneip strategy director Mario Mantrisi, also broached the subject of reputational risks related to greenwashing. “What would be your advice?” he asked the panellists.
“First, be conservative,” answered Rick Lacaille, executive VP and global head of ESG initiatives at State Street. “The obvious thing is being cautious in an environment where greenwashing risk--and the accusation of it--is a big one. So be pretty cautious, and obviously, be mindful of the regulations in the place you’re operating.”
If you’re going to control greenwashing, which is a kind of enterprise-level risk, you want to make sure it kind of percolates throughout the entire organisation in a consistent way.
“But above all, be very clear about your desire to communicate with your end investors and distributors and what’s actually happening, and why you think it’s important,” said Lacaille. He gave an example: if it’s important to focus on an issue like inclusion and diversity when analysing securities in a particular industry, “articulate why that’s valuable to driving long-run value for stakeholders, and what sort of measures and how you’re building that into your investment process.”
“You have to be super careful to make sure that you’re actually delivering on the promise that you’ve made,” Lacaille cautioned. It’s also important to ensure that all teams--from the front office to the compliance team--are looking at the same data. “If you’re going to control greenwashing, which is a kind of enterprise-level risk, you want to make sure it kind of percolates throughout the entire organisation in a consistent way.”
Lacaille anticipated that in five years, the investment practice will be for all funds to embed sustainability. The investment industry itself is changing, he noted. People who are entering the industry now consider sustainability to be “normal.” Unfortunately, the fund industry tends to be backward looking: things that perform well attract more money, but if they do badly, people retreat. However, for the mainstream, sustainability “may not be the dominant feature, but it’s becoming a normal part of investment.”
Data integrity and transformation
The need for data integrity, privacy and standardisation was highlighted during the panel dedicated to the future of fund data. During the panel on global distribution growth, speakers covered the importance of transforming data into digestible pieces of information, as well as the necessity of regulation to protect end-investors and the need for transparency, particularly with regards to ESG.
Delano and its sister publication Paperjam were media partners of the conference. Watch the replay of the conference here.