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Managers and investors split on ESG integration, with data clarity a major roadblock

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Fund managers and investors remain split over how they integrate environmental, social and governance (ESG) factors into their risk and investment processes, with industry participants citing a lack of clarity over data reliability, comparability and standardisation as the main challenge. 

Fund managers and investors remain split over how they integrate environmental, social and governance (ESG) factors into their risk and investment processes, with industry participants citing a lack of clarity over data reliability, comparability and standardisation as the main challenge. 

Alternatives-focused software-as-a-service and data management firm Vidrio Financial, in partnership with boutique advisory firm Close Group Consulting, polled a broad range of fund managers and institutional investors on how they are integrating ESG strategies into their overall investment process, and explored some of the data and structural challenges they face.

The latest ‘Vidrio Views’ survey – which was carried out ahead of the United Nations’ COP26 climate change summit in Glasgow – found that the challenge of ESG data comparability and reliability remains the primary roadblock when it comes to firms integrating ESG investment practices. 

Specifically, some 42 per cent pinpointed ESG data challenges on comparability as the key barrier, while 25 per cent of those quizzed cited confusion over what constitutes best practice as the primary roadblock. Meanwhile, a further 16 per cent of respondents believe that calculating ESG-specific performance is the main hurdle to integration. 

“True ESG integration is an issue that investors and allocators alike have been wrestling with for many years and not something we feel is going to be simply resolved over time,” Vidrio and Close Group observed in the study.

The report surveyed a mix of corporate pension funds, endowments, fund managers, funds of funds, OCIOs and others in both the North America and EMEA regions.

Allocators and managers are also similarly split on how important they consider ESG to be as an investment factor, and how they apply ESG factors into their risk and opportunity assessments. 

Close to a quarter (23.08 per cent) said ESG is a key investment factor, in line with financial factors, within their investment processes. But the same number said that while ESG is a key investment factor, it is at a lower weight than financial factors, while a further 23.08 per cent said the importance of ESG factors depends ultimately on the strategy and underlying investment. Some 30 per cent did not consider ESG to be key investment factor.

At the same time, 38 per cent actively apply ESG factors to their risk and opportunity assessments, 31 per cent do not, while 23 per cent are not currently applying ESG factors, but plan to in the future. About 8 per cent are awaiting more concrete regulatory standards before formally incorporating an ESG framework into investment decision-making processes.

Quizzed on the main drivers for ESG integration, most fund managers (80 per cent) said the question did not apply to them. But elsewhere, other drivers of ESG integration among managers include alpha generation (10 per cent), meeting client/LP demands (10 per cent), helping the firm remain competitive (10 per cent), and advancing their firm’s competitive positioning (10 per cent).

On the investor and allocator side, the drive for ESG integration is fueled mainly by board or stakeholder demand (72.73 per cent). Meanwhile, creating alpha was the main driver among 18.18 per cent of respondents, while managing risk (18.18 per cent), aligning with market best practices (18.18 per cent), and aligning with peers (9.09 per cent) were also cited as major drivers.

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