Global fund managers are increasingly relying on in-house data for environmental, social and governance (ESG) purposes, according to a new Russell Investments survey.
The Russell study found 55 per cent of managers now primarily use internally produced quantitative data to gain ESG insights compared to just 40 per cent in 2019.
But the survey wasn’t all bad news for third-party specialists as more managers now tapped external ESG data-suppliers for second or even third opinions.
“… the sole reliance on internally produced ESG metrics declined to just 6% in the 2021 results, compared to 14% in 2019,” the paper says. “These findings point to the movement of an increasing number of asset managers toward utilising ESG data providers – whilst conducting their own underlying analysis as the key driver in ESG assessments.”
External data issues such as inconsistency and non-comparability have long plagued the ESG industry, constantly topping the fund manager complaint lists in responsible investment surveys such as the Index Industry Association effort published this July.
Russell says, however, managers will continue to use third-party ESG data to complement internal research.
“We believe that best practice will come out of a skilful blending of in-house proprietary information and views, alongside analysis of public data,” the report says.
The ESG data-rush has seen a number of new firms enter the sector but in a trend offset by rapid consolidation, the Russell study says.
“Many vendors are participating in acquisitions: Sustainalytics was bought by Morningstar, Trucost became a part of S&P, NS Vigeo Eiris was bought by Moodys, Oekem was acquired by ISS [Institutional Shareholder Services] and TruValue is now a part of FactSet,” the Russell survey says. “More recently, acquisitions are occurring among niche data providers. Given the high demand for ESG-related data, the number of ESG data providers is increasing and so are the acquisitions. The market landscape of ESG data providers is evolving. Each vendor is enhancing their existing methodology and expanding their coverage in order to stay relevant in today’s rapidly growing competitive landscape, whilst trying to better align with the regulatory evolution.”
Sustainalytics and MSCI lead the ESG data pack in market share across most asset classes, followed by IIS: collectively, though, niche providers have garnered significant support, particularly in alternative assets where the ‘others’ are the most-used data-suppliers.
“The survey indicates that many asset managers subscribe to multiple ESG data providers, suggesting that there is yet to be a provider that offers a single solution for asset managers across all asset classes, or asset managers see value in having multiple viewpoints,” the report says.
Overall, the Russell survey of 369 asset managers across the world, representing more than NZ$100 trillion, confirmed ESG as a deeply entrenched industry trend.
About 90 per cent of respondents now apply ESG considerations to investment decisions, the report says – and more in a more serious fashion.
The survey found that 75 per cent of managers now include specific ESG factors in investment decisions when ‘financial materiality’ is high compared to just 55 per cent in 2019.
“This response suggests that more asset managers treat the evaluation of the impact of ESG considerations as a risk-management exercise,” the Russell report says. “… While it’s understandable that investors incorporate material factors into investment decisions, what remains unclear is whether ESG is another tool to monitor risk, or if it actually influences investment decisions.”
Governance remains the number one ESG factor weighing on investment calls (80 per cent ranking it the most important in 2021) although environmental concerns have risen from 5 per cent in the 2018 survey to 14 per cent this year: the ‘S’ factor has hovered between 4 to 6 per cent over the same time period.
“Globally, governance continues to dominate among ESG factors which influence investment decisions at 80%,” the study says. “In Australia and New Zealand, just 14% of managers say environmental concerns drive investment decisions, despite climate risk (64%) and environmental issues (23%) leading local asset owners’ ESG concerns.”
In a release, Sydney-based Russell global equity portfolio manager, said ESG was evolving quickly in the Australasian investment industry with climate risks, in particular, on the rise.
“More immediately, asset owners are demanding insight into how their assets will be managed in a net zero world,” Harwood said. “For savvy managers, it will pay to demonstrate to clients how decarbonisation targets will impact the value of their assets, and the level of management required to transition their assets to this new reality.”