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Northern Trust tapping data transparency and ESG to navigate volatility

Northern Trust tapping data transparency and ESG to navigate volatility

American financial holding company Northern Trust’s head of front office solutions, Melanie Pickett, tells Finextra Research about some of the complexities in delivering reliable data analytics to institutional clients, which are of even greater importance during periods of volatility such as now.

Pickett also singles out the value of helping clients unlock data in their investments that speaks to what is important to them, be it certain sectors or regions, or, increasingly, ESG performance.

Northern Trust has announced this week that it is bolstering its sustainable analytics capabilities to provide institutional investors with greater transparency to the ESG risk of their portfolios.

The US asset manager will provide its clients with “periodic snapshot analysis” of their equity and bond portfolios, giving scores for their investments against ESG factors and the UN’s Global Compact principles.

Investors can monitor the ESG rating of their funds on an absolute and relative basis, comparing asset managers’ scores against one another.

The data used to provide this information can be harnessed by institutional investors in their reporting and regulatory obligations while facilitating discussions with investment managers and mitigating against reputational damage or concerns from stakeholders.

Citing the present period of volatility global markets are experiencing as a result of the Covid-19 lockdown, Northern Trust states that investors with an understanding of a company’s governance structure have an advantage through being able to see a “more complete picture of its resiliency”.

Navigating volatility

For the institutional and ultra-high-net-worth (UHNW) clients of Northern Trust, whose portfolios extend to real estate, private equity, venture capital and hedge funds, having access to sufficiently rich data is of paramount importance but is often absent.

“Asset owners with significant concentrations of alternative investments often don’t have available to them or at the ready a set of data about what the underlying exposures within those funds are,” Pickett says.

“On top of that, valuations in private equity come to them only once a quarter and are typically on a 45-day lag, so they are typically about five months behind the market.”

Such a lag is far from ideal at the best of times but could prove disastrous in a period of volatility as has been experienced in 2020 Q1. When one considers the rollercoaster that some bellwethers of the global economy have taken in recent months, such as oil or house prices, the importance of having up-to-date data and consistent evaluation of assets is highlighted.

In October 2018, Northern Trust took equity in front-office data provider Parilux, who built the system that, according to Pickett, formed the foundation of the data model for their clients.

"What this data model does is allow our clients to classify their assets, exposure lenses or risk factors, in such a way that is meaningful to them,” Pickett says.

The majority of clients will look to traditional classification such as geography, sector, counterparty instrument rating and so on, but an increasing number of investors are also attuned to ESG factors.

Clients can look across both their public and private markets portfolios and understand their exposure to certain regions or sectors. In the present climate, for example, they may find themselves to be overweight in autos and retail but underweight in healthcare or consumer goods and so on.

Pickett states that this system allows investors to “find the lenses that are important to them in an unlimited, customizable way”.

Operational efficiency

Pickett also explains how Northern Trust are looking to harness AI in order to automate some of the work involved in this workstream, which she sees as vital to keeping the data analysis slick and up-to-date.

"If you're invested in 500 private equity funds and their results are coming to you every quarter as a PDF, you have to manually scrape data off those documents and formulate them into normalised models for the system,” she explains.

“So, we are making a lot of investments in machine learning and AI to help us out and make this work.”

This is linked to a broader aim of optimising operational efficiency, which is of even greater importance during uncertain times.

"If you think about it, every organisation has a finite amount of resources and during times like this, what you want your investment team and your operations team to be most focused on is utilising that data to identify risks and changes in the portfolio,” Pickett says.

Northern Trust clients often inform them that they are spending far more time managing their data than they are analysing it.

“We need to empower asset owners with better technology and with better tools, they can manage their portfolios better, staying focussed on the things that matter and create a better return for their institution,” Pickett concludes.

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