ESG Industry Challenges: New Solutions
The FrostRB ESG Research Valuation/Integration Framework allows asset managers to create
customized ESG valuation parameters, regardless of their current research valuation process.
ESG research inputs are particularly difficult to value, given:
- the variety of approaches and ESG implementation strategies used by different managers
- the fact that important ESG research inputs, including databases, do not lend themselves to document or interaction counting.
ESG Issues and Opportunities for Asset Managers
Many asset managers are offering ESG products and are striving to integrate ESG principals in their
Many asset owners would like managers to demonstrate how they are integrating ESG principals into the investment process.
As internal and external research are important inputs in fundamental strategies, how is ESG research integrated into the investment/research process?
Given the variety of ESG approaches, how can managers value ESG research based on their investment products and their individual ESG frameworks?
How Are the Expectations of Asset Owners, Consultants and Advocacy Groups Changing?*
Require asset managers to regularly report on how responsible investment issues are being managed
throughout all stages of the investment process …….
Asset managers should integrate ESG into their regular sector and company research and include ESG
in the broker vote process.
Ensure that CIOs and managers ask portfolio teams who use ESG/SRI research to quantify that value
and ensure that the broker liaison officer includes ESG/SRI in the firm’s regular broker assessment/reviews.
Frequent Asset Owner/Consultant Questions:*
What ESG data, research resources, tools and practices do you use to integrate ESG factors into your investment process, valuations and decisions?
What weighting to ESG factors have on the decision-making process and investment decisions?
Where do you source ESG research and tools?
Do you make your own assessment on ESG issues ore use third-party ESG Rating?
* Sources: PRI, IRRI Survey 2019, ShareAction
Manager Research Integration Issues
All to often, the fundamental and ESG analyst teams at asset managers are operating in completely separate realms.
Integration is a major challenge, particularly for complex managers running multiple investment strategies/products/asset classes.
The FrostRB Framework systematically facilitates this integration, regardless of the complexity of the manager.
Frost’s unique strategy research benchmarking database provides context for both asset managers and asset owners.
Given the sheer diversity and scope of the UN's Sustainable Development Goals ......
...... each asset manager must choose their own ESG focus.
Managers must also choose which of the ESG implementation strategies they will adopt, and in what proportion.
All of these choices will have an impact on the absolute and relative value of the ESG research inputs to the manager.
Variety of Research Sources
The ESG research valuation process is complicated by the fact that most managers use a variety of internal and
external ESG research sources ...........................................which must serve both ESG products and other funds
increasingly incorporating ESG factors.
How can we determine the value of ESG research inputs…..
- given our particular ESG process?
- given the diversity of research inputs (data/documents etc.)?
- at the fund/client level?
How can we demonstrate the integration of ESG research into our wider research process to clients/ stakeholders?
How can we determine whether incremental ESG research spending should be internal or external?
Current State .....
Many managers have struggled to integrate ESG factors into the investment process and into their current research valuation process .............
The FrostRB ESG Research Valuation/Integration Framework provides a solution by working with the manager's existing research valuation process.
Trans-Atlantic Evolution of ESG Fund Reporting
All European funds will have to demonstrate ESG integration. ESG specialist funds will have to conform to the EU Green Taxonomy.
The incoming Biden Administration is likely to place a greater emphasis on ESG reporting via both the SEC and Department of Labor, which runs ERISA, which in turn regulates US pensions.
It is unlikely that US regulators will demand European-style disclosure. However, client demand for ESG products analysed by asset owners and consultants may lead to market pressures for greater disclosure.
Mark Carney, the UN's Special Envoy for Climate and Finance has suggested a more dynamic alternative to the EU Green Taxonomy.
Specifically, he recommends an approach in the following paper authored by Generation Investment Management Co-Founder, David Blood.