Alternative fund services

Private market investors have similar yet specific ESG data needs

Riccardo Lamanna, branch manager and country head for Luxembourg at State Street, spoke with Delano last year about serving the ESG data needs of private market asset managers and investors. Photo: State Street

Riccardo Lamanna, branch manager and country head for Luxembourg at State Street, spoke with Delano last year about serving the ESG data needs of private market asset managers and investors. Photo: State Street

Alternative fund investors seek much of the same environmental, social and governance (ESG) data that traditional fund investors need, but with a couple of complex twists, according to Riccardo Lamanna, head of the custody bank State Street in Luxembourg.

Information about private market investments can be quite nuanced and very unstructured, Lamanna said during an interview.

He stated that roughly 100 of its 1,000 staff in Luxembourg work on alternative funds (not including State Street’s announced acquisition of Brown Brothers Harriman’s investor services operations), but that it is growing part of its business.

Aaron Grunwald: From your point of view, what are the key ESG issues--regulatory issues, data challenges--facing private market fund firms right now?

Riccardo LamannaRiccardo Lamanna: If we look at private markets, the ESG items are not too different from what we see in the traditional world, but with a little bit more complexity, even with the unstructured nature of the asset classes we’re talking about. And similarly to what we see in the traditional market, there are different trends, which are, I would say, pushing alternative asset managers to be more and more focused on ESG. There is a regulatory impact which is coming, not dissimilar to what we see with traditional asset management, with [the Sustainable Finance Disclosure Regulation]. And some specific impact and regulation which is coming for alternative asset managers.

Mainly, I would say, it is the push coming from investors. Because, why? Typically, until [recently], real estate, private equity and loans were more for high net worth individuals and some institutional clients. It’s more and more becoming now the place where asset owners and insurance are investing. And typically, asset owners as well as insurance are paying a lot of attention to ESG factors, because they have to respect their own policy, they have to respect their own structure. And obviously, they need to invest in something which is meaningful from the ESG point of view.

This is not dissimilar from what we see in other asset classes, but here, it’s getting a little bit more [specific] because of the needs of the investors. On the other side, you have, obviously, private equities. New companies need to attract capital, they need to attract funding. And, you know, they’re in the very beginning [of building their business]. So they might not seem to be interested in ESG, but then if you look into it, the need they have to get funding [forces] them to behave according to ESG factors.

It’s a little bit different depending on the type of assets you’re looking into. So if you think about real estate, it’s mainly environmental. It’s mainly where you want to focus because the impact that real estate has on the environment is obviously very important. But, if you look at it from the eye of the asset manager and its clients, it’s also the social side. Because, if you invest into commercial real estate, you want to know who the tenants are. And you want to understand the nature of tenants. So if you are investing on behalf of an asset owner, or a pension fund, you might not want to invest in a building where part of the property is rented to a tobacco maker or arms maker....

The other comment that we have to make is that, not dissimilar to what we faced in the very early beginning of the ESG, for traditional assets, there is very little in terms of standardisation of [ESG] information coming from private assets. The coverage is limited, because we’re talking about, in many cases, some small companies. And in many cases, we’re talking about very sophisticated and complex information, like the one I mentioned before. So, if you want to look into your tenants and get information at the level of the investors on the tenants, it gets quite complicated. And the availability of information, coupled with the complexity of the information, which somehow is tailormade on a specific investment, makes it very difficult to collect information in a way that can be effectively used and input into whatever system you need or whatever process you are looking at it. So we are facing quite a difficult environment from an ESG point of view and you need sophisticated systems and sophisticated reporting to satisfy the needs of the asset managers.

Then you have a lot of very unique and specific information coming from the companies or projects. How can you provide standardised or harmonised reporting back to the asset manager or investor?

Yeah, it’s a complicated approach, if you think about how information is flowing from the target companies or the target properties to the asset managers, and then how you make it available, because typically the source of the information is unstructured. Not only is unstructured, it comes in different formats. So you might have fax, you might have paper, you might have PDFs, you might have emails, whatever, so there are many different ways in which the information is coming to an asset manager. This is one of the most complicated aspects of [this issue]. Also, the flows from the asset managers to the clients get complicated and they don’t have tools which are sophisticated enough to standardise the information and make it available.

So what you need to do is to become a little bit of a plumber. You know, you bring all the tubes together and you try to facilitate the work of your clients. So we at State Street, as a service provider, we’re trying to effectively facilitate the standardisation of data by collecting the data through flexible tools. We’ve just bought up one company, which is called Mercatus, which does this effectively. So our idea is to, on one side, make the information on the NAV available in a much quicker and faster way. So that you can work on electronic information as an asset manager. And, on the other side, we are collecting information from a number of properties. And through Mercatus, we’re making [this data] available in electronic format.

We do not really create a standard ourself--we say, look, we want this information, we want [the data] to be classified in this way--we’re trying to collect as much information as possible, and make it available in a usable way.

You mentioned that a lot of this information is coming from small companies and the information is quite complex. Are you finding that the data is reliable?

The information is reliable. I mean, in most of the cases, we at State Street are not really taking any judgment on the information that we receive. [It] is more the asset manager that needs to better understand and put in place checks on what the information is telling them and whether this information is right or wrong. You can do cross checks, you can apply some double sources, or look on the internet and look up different reporting and try to do the checks, but this is typically the guarantee that the asset manager should give to its investors.

There is an element here, which is more critical, which is coming from the role of the depository bank. If you think about what the depository bank does, the depository bank is there to protect the final investor and mainly to verify that the information which is coming from the asset manager is reliable, where the property or the ownership of the asset is effective. And we exercise these [duties] as a security service provider. We have our depo bank function and this is where sometimes it helps. It’s not really going into too much on the ESG, but when the ESG factors are prominent in the investments and the ESG factor becomes a very important element of the investment of the asset manager, the depository bank has to take a stand there, and understand whether, yes, the things that are being said about a certain solar plant or renewable energy type of project or investment is effectively what is expected. You need to make sure that that investment is truely what is being invested in, but it’s also aligned with the investment strategy of the asset managers.

So, is it fair to say that, at State Street, what you’re mainly trying to do is put a little structure on unstructured data. But when ESG is promoted as an important part of the investment, you’re conducting some sort of spot check to at least verify some of the information?

We are obliged. It doesn’t come directly, it comes indirectly, but yes, we are obliged to do that. And it is one of the most difficult things to do.

If you think about an investment into, as I said, a solar plant or renewable energy, you can’t go and see [each site physically yourself]. You need to rely on information that you get and understand how best you can discharge your responsibility. And do what the depository bank should do with the investors. But obviously, it’s not an easy task. And this is making the entire investment process and controls of the investment process difficult. And the various checkpoints, and the guarantee that you give is very, very important.