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Institutional Investor Financial Technology Forum Winter Workshop Automating Alpha Feb 9 2022

Event panel review: Applying Advanced Technologies to the ESG Investment Process

On February 9, our President and Co-founder Greg McCall sat on an Institutional Investor’s Automating Alpha panel entitled “Green Machine: Applying Advanced Technologies to the ESG Investment Process” about how technology can help investors maximize the inclusion of ESG within their investment process. He joined Northern Trust Asset Servicing’s Head of Investment Data Science Paul F. Fahey, PineBridge Investments’s CTO Henrique Francisco and The TCW Group’s Global Head of ESG Olivia Albrecht. Four main points stood out.

The need for “best practices” use of ESG data sources within the Investment Process

Many asset managers are using multiple data providers, as data quality and needed breadth is not often complete with a single vendor. In addition, they need to:

  • Manipulate and interrogate the data to maximize its effectiveness.
  • Organize ESG data alongside other workflows, whether those are market data, research notes (following different controversies within a particular corporation), etc.
  • Audit their ESG research to hold both management teams and rating agencies accountable to their actions.

53% of the audience
have five or more external ESG data sources

For “best practices” success, your ESG tech stack must be flexible

The rules of the ESG game are changing so fast and often that the technology must adapt with the same speed. Because of this, it’s necessary to have a solution in place that is configurable by nature, and scalable to be able to grow along with the business. Being able to adjust these workflows, outputs, how you report, what format you report—all of that is absolutely critical from the regulator on down to the analyst when using ESG (or any) data. Ultimately firms want a degree of flexibility to really tear apart the information, reorganize it, integrate it within their existing processes, and then be in a position to enforce and audit those results because they are so critical to their fund flows.

The data capture challenge

While ESG is at the forefront of conversation, it’s still only one piece of the intelligence needed to gain meaningful insights. A fundamental investor must ultimately incorporate their ESG data into the entire investment lifecycle to utilize and make better investment decisions or understand the decisions made. Using a flexible platform solution to facilitate the aggregation of multiple data sources, including the multiple sets used within ESG, can maximize its impact on the investment process – not only be used as a reporting mechanism but more importantly utilized as a way to control the data integrated into the investment process for forecasting, optimizing, risk decomposition, performance attribution, etc.

50% say they have onboarded a number of ESG data providers but are struggling to consolidate or reconcile them

Technology makes ESG experts smarter

It’s important in your organization to have a series of experts who can disaggregate the data to pull out insights and analyze those data points for validity—to dig under the surfaces. It’s equally important for those experts to be able to share data within the tools of a portfolio manager that gives them an understanding of how much weight they should put on specific ESG values, or what their next best action is—and do that in a scalable way across the entire universe. You also need to provide insights to that IR or marketing person when the ranking of their particular fund is believed to be incorrect; they need to be able to audit and prove the reasons why it doesn’t align with their views. All of that requires some level of interaction with a user base that is already overtaxed to begin with but needs a usable system. The goal is not only to be able to ingest that data and organize it, but also to make it usable for investment teams so that they can actually make those decisions, audit those results, track their performance, the same way they do picking stocks based on revenues, margins, strategies, product and themes.

At the end of the day, ESG integrated into the investment process is still very much in its adolescence, but there are already efficient and cost-effective ways to control ESG data and leverage it proactively to maximize fund flows, research processes and compliancy. Fundamental investors can automate the ESG investment process they set forth with a modular platform that works specifically for their unique strategies, while simplifying a complex set of ESG data that can provide advantages in your decision-making process.

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