ESG investing is gaining momentum but how do fund managers and investment firms rapidly evolve to make it an integral part of how they do business?

The climate crisis, corporate mismanagement, COVID-19, social justice movements – each in their own right have had a significant impact on how we perceive business value and business purpose. Combined, and appearing with such frequent cadence, our views have been affected at a fundamental level.

A company’s environmental, social, and governance (ESG) practices are now perceived as indicators of financial returns and an important barometer of its current and future health. In fact, a recent Institutional Investor Trust report found that 88% of investors believe companies that priortise ESG initiatives represent better long-term return prospects. As such, there has been a growing demand for funds with an ESG investment mandate. Globally, ESG assets are forecast to exceed $53 trillion USD by 2025.  

ESG is not driven by sentiment alone. New compliance and regulatory frameworks are being introduced all over the world. The EU parliament, for example, recently passed ESG-related disclosure regulation and taxonomy regulation, both designed to form pillars of a new sustainability framework and action plan.

It comes as no surprise then that ESG has become a new, burgeoning market. We have seen new indices emerge, such as MSCI, that measure companies’ resilience to long-term ESG risks. But, as with all virgin markets, ESG investing is developing rapidly. Portfolio managers now must make sense of huge amounts of new data. These can be both structured and unstructured, and from various sources such as news media, company communications, exchange figures, data vendors, and so forth.

It is a significant challenge, essentially re-evaluating several thousand companies to understand their prospective ESG rating to create new or realign existing portfolios. Compounding this is the need to turn these portfolios around in a short amount of time, while maintaining trust and compliance in the investment spread.

In short, investment firms need to think about this actively, and it is likely useful for them to get a sense of how to go about it - quickly. It is a data challenge, at its core. Portfolio managers are turning to technology, and AI clearly has a lot of potential here.

Integrating an ESG investment framework

From working with investment management customers globally, at Mindtree we know there are some core, consistent challenges faced when rolling out and aligning across stakeholders around an ESG value proposition.

First and foremost is scale. How do you roll out a technology-based solution across the entire business so that it is made usable for all stakeholders? Integration compounds this challenge. Within the asset management businesses, employees typically work separately within groups, yet there needs to be a source of truth and consistent understanding of what qualifies as sound ESG investment, for example.

But this too gets further complicated as use cases for rolling out ESG qualifications differ by line of business. Portfolio managers looking at fixed income markets have different priorities to those in equities, or multi-asset solutions. One might be looking at globally applied ways to rank stocks, while the other at ways to rate levels of risk, real-estate frameworks, or even climate factors.

Fortunately, we know with the right framework in place, each of these challenges can be met head on.  It consists of five core pillars, each of which can be viewed as dedicated work streams, but as a whole set provides a business architecture that ensures consistency and reliability:

1. Assessing current state with Data: Identifying and agreeing the levers for ESG integration, assessing and understanding what data is already available, where the gaps exist, and how to source what is missing is a vital first step
2. The need for an accessible data hub: Ensuring consistency across the business allows for proper governance and best practice investing. Building a data hub to which everyone across the management firm has access, can access, edit and draw insights from, forms a strong foundation on which to build technology and business lines. This is where the data portfolio, analysis and reporting repository would sit – with capabilities to house this on the cloud, we have seen significant success
3. The intelligence layer: Applied AI and data analysis tools are what will make this data manageable. This also allows for individual data models that map to specific lines of business to be built while still drawing from the same source of truth and pre-established principles
4. Reporting: Transparency is vital to ensure customer confidence. Reporting, disclosure, and governance processes that provide the transparency, compliance and ultimately trust is key
5. Visualisation: Finally, how you bring this together to visualise and navigate each of these layers across the different stakeholders will have a direct impact on results and usability

Throughout all of this, the partner ecosystem is vital.  Investment management firms should look for a collaborative and trusted group of solutions providers, each with their own areas of excellence.  These will span hyperscalers, cloud data solutions providers, customer relationship management, data analytics providers, and technology consultants to help piece it together.

It presents a significant but entirely surmountable challenge for firms provided the right steps, structures and processes are in place.

It may be that an organisation decides to approach each stage in a staggered fashion to incrementally futureproof their investment processes, assessing feasibility or getting a lagging line of business up to speed. Mindtree, for example, has worked on singular units of business, such as carbon footprint reporting, rolling out cognitive data processing capabilities, all the way through to bringing together and managing our partner ecosystem to establish this entire framework. Select firms are already establishing a name for themselves in this space, well ahead of the market with intelligent ESG models incorporated in their core investment process.

It is an exciting time for investing. It represents a new way of thinking, with renewed priorities. Investment management firms must grab the bull by the horns - build reliable ESG frameworks - in order to stay competitive, and with purpose drive values.