With ESG data now a hot commodity across the financial services sector, hedge funds and other asset managers must dig deeper into company metrics to gain an edge, as the industry continues to grapple with a lack of consistent standardisation of sustainability scoring.
With ESG data now a hot commodity across the financial services sector, hedge funds and other asset managers must dig deeper into company metrics to gain an edge, as the industry continues to grapple with a lack of consistent standardisation of sustainability scoring.
Silvia Merler, Head of the ESG Committee and Head of the Policy and Research Forum at multi-strategy credit and equities-focused investment manager, Algebris Investments, said ESG data is now vital for investment firms, not just for integrating sustainability factors into the investment process, but also when it comes to reporting to clients and investors.
“It really is the commodity everybody is after in the industry,” said Merler, speaking at this week’s GlobalESGLive summit, hosted by Hedgeweek alongside sister publications Private Equity Wire and Institutional Asset Manager.
Merler leads internal ESG research and assessment across strategies at Algebris, which manages several long/short and long-only strategies across global credit, equity and non-performing loan markets, and which is preparing to launch a private equity vehicle focused on the green transition.
With ESG data now fiercely in demand among managers, investors and, increasingly, regulators, she acknowledged that a key challenge continues to be a lack of consistent, standardised methodology for producing ESG scores and ratings. The other major headache that potentially can hamper investment decisions is the scope of ESG coverage of the small-caps sector.
“Most of the big ESG data providers in the industry today focus mainly on the big market indices, but the small-cap sectors, the SMEs, which make up the majority of many European markets – think about Italy or Spain – those are outside of the scope of the ESG data we have access to today,” she explained. “For that particular corporate segment, you are left in the dark, unless you do your own research.”
Merler told a data and metrics-focused panel session that many firms are therefore increasingly relying on their own proprietary questionnaires in order to unearth ESG data on such smaller caps.
As asset managers and investors try to fill in the data gaps, Merler described how Algebris explores beyond headline ESG scores.
“We look at a number of KPIs that are quantitatively more important and easy to measure,” she explained.
For instance, in the financial services sector – a core area of Algebris’ investment universe – the firm looks to NGOs’ data in order determine banks’ exposure to fossil fuel funding, she said. “This kind of data remains under-exploited, and there isn’t much visibility on data that is not coming from the big ESG data providers.”
A low ESG score for some companies can often mean many different things, she said, noting that managers and investors should again delve deeper into KPIs and questionnaire answers.
“That takes us to another level of policy which is that of engagement,” Merler told the session. “Depending on where that score is coming from, that gives you as an investor information that you need when you go back to speak to the company and focus on important issues.
“Is it a question of having a formalised ESG policy up on the company website? Or is it a more material, substantial issue of changing the way the company does business and its corporate governance? The key is to always look in-depth at the data you are using.”
Expanding further, Merler explained how there are several levels to this process.
“The basic level is exclusions – things you don’t want to touch, a red line you don’t want to cross. You don’t want to invest, for instance, any company involved in controversial weapons,” she said. “But different investors obviously have different red lines. Elsewhere, when it comes to investing in or divesting from company because of how their ESG profile is changing, I think here there is a lot more room for engagement.”
