The data debate: ESG and Climate Risk

By Pat Sharman, Country Managing Director, UK, CACEIS

Working with increasing amounts of data on ESG and Climate risk factors will quickly become the new normal. ESG and Climate impacts are traditional risks, much like financial risk – and this requires lots of data. The demands for more granular reporting will also increase, driven by evolving regulation and growing demands from investors, especially asset owners. And let’s not forget that the skills and knowledge to interpret this data need to grow.

As a securities services provider, CACEIS handles large volumes of disparate data, which includes ESG and Climate reporting for asset managers and asset owners. Here we explore why detailed data is critical and the important role it plays in delivering sustainable governance to protect investors and pension scheme members’ savings.

The growing role of data in sustainable governance

Boosting governance has been a step-change and priority for the asset management industry, and improved transparency and access to data has been an important part of dealing with the intensifying regulatory focus on ESG and Climate risks. As these new waves of ESG and Climate data start to flow into governance and reporting processes, confidence in data integrity and quality is paramount.

Against this backdrop, we recognise the current challenges in obtaining consistent data, partly driven by the different methodologies used across vendors in their analysis of ESG and Climate risks across companies and bond issuers. Global reporting standards are also ‘work in progress’. However, this should not be a barrier to making a start on collecting and reporting on ESG and Climate risks. Finding and sticking to a framework is key – and the earlier this process is started, the sooner asset managers can start building a pattern of data, which will help governance and investment decision-making.

A good starting point is developing a data strategy, which encompasses the sources and frequency of decision-useful data, along with processes on how this data will be interpreted. Some asset managers and asset owners have leveraged the Task Force on Climate-Related Financial Disclosures framework as a good starting point to help set their data strategy.

As a securities services provider bringing together reporting solutions covering ESG and Climate risk, we know that data covering these areas is widely available. This means asset managers can get their hands on information for their ESG/Climate reporting and governance requirements. However, the devil is in the detail.

In our recent survey of fund professionals, only 31%¹ had sufficient data to examine climate risk exposures a granular level across all their funds.

We believe granular data is a ‘must have’. To properly assess the risks, data at fund portfolio level is not going to be sufficient. More granular insight by security, issuer, sector and country level will be required for these key reasons:

A traditional risk

We believe that ESG and Climate factors must be viewed as traditional risks, much in the same way investment risk is. This means ESG and Climate data should be collected across all funds, and not limited to strategies that have a specific climate or environmental objective.

Fund board oversight

Fund boards are going to be critical in overseeing the governance relating to ESG and Climate. They have a fiduciary responsibility on behalf of investors to oversee a wide range of risks. This means they’ll need more information on the ESG and Climate impacts within the funds they are overseeing so they can get the assurances that all risks are being managed. For this reason, data is going to be an important area for fund boards to help them assess how material ESG and Climate risks are captured, monitored and managed by investment managers, alongside validating how individual funds are meeting their Scope 8 and Scope 9 commitments.

Asset owner demand

Globally, asset owners are entrusted to manage over US$56.6 trillion in global pensions assets² for pension scheme members. Investing for sustained growth is a key priority. In some markets, regulation is driving the need for asset owners to report on their ESG and Climate risks. This accountability means the need for granular data will increase, driving demand for more information from asset managers.

What next?

Partnering with specialists and security services providers can help asset managers unlock independent, high-quality insights and make effective data driven decisions. As a data aggregator, CACEIS unlocks the power of reporting by consolidating ESG and Climate data from different sources into one dashboard to provide a consistent view of risks. This efficiency, flexibility and consistency will become key priorities for asset managers as sustainable data requirements grow.

¹CACEIS/Funds Europe survey to 248 fund professionals globally – March 2022

²Willis Towers Watson Global Pensions Assets Study 2022

³CACEIS survey, 2020, in partnership with the PLSA

⁴CACEIS/Funds Europe survey to 248 fund professionals globally – March 2022

Developing skills in this new normal

The world of ESG and Climate information can be complex, especially when it comes to interpreting and acting on the data. It’s no surprise, therefore, that there is a growing need for education. For example, in one of our surveys to asset owners in the UK, over 70% of respondents wanted to see more training on how asset managers are implementing ESG and Climate change factors³.

And once it becomes more widely acknowledged that ESG and Climate risk should be viewed as a traditional risk, not just to funds or mandates, but also across business and risk management processes, functional areas such as audit and compliance will need to upskill. We’re already seeing some traction here. Over 21% of respondents in our global survey to fund professionals cited that their firm have prioritised the development of an educational framework to upskill key employees across all functional areas⁴. It’s a great start and maintaining this momentum across the industry is critical.