Addressing APAC’s ESG Data Challenge
Time to Act
We explore the impact of ESG data complexities for APAC’s institutional investors.
Asia Pacific (APAC) may be lagging behind Europe when it comes to environmental, social and governance (ESG) regulation and standard setting, but the need for sophisticated and comparable data sets is no less urgent for the region’s investors, who are piling into ESG assets at pace. Waiting for regulators to catch up is not an option; the industry must push ahead with its own solutions today.
Director of Analytics, Asia Pacific
APAC’s ESG market is growing rapidly. There were US$88.3 billion in sustainable assets under management (AUM) in Asia, Japan, and Australia and New Zealand combined as of June 2021, which was a 240 percent increase from Q2 2020.1 MSCI’s 2021 Global Institutional Investor survey found that 79 percent of APAC investors increased ESG investments “significantly” or “moderately” in response to COVID-19, while 57 percent expect to have significantly incorporated ESG issues into their investment analysis and decision-making processes by the end of this year.2
With fast-growing allocations to ESG investments and rising stakeholder pressure to disclose on these issues, the need to raise the game on ESG data is self-evident. However, the fragmented approach of APAC’s regulators leaves the region’s asset owners and asset managers facing an uphill struggle.
A fragmented landscape
Currently, there are fewer regulations governing ESG in APAC compared to Europe and each APAC jurisdiction employs its own framework. Without a universally agreed approach, the standards of data and reporting requirements significantly vary . Even the definition of what constitutes an ESG investment differs substantially depending on the jurisdiction.3
Learning to navigate APAC’s unique ESG data market is not an easy journey and investors need time to understand the nuances. One of the most significant of these is the lack of transparency and verification of data in many markets, which creates challenges for reporting and restricts the ability to extract reliable investment insights. This is an issue for large markets like China, India and Indonesia, as well as smaller developing nations, like the Philippines.
The absence of a strong regional regulator like the European Union (EU) has seen investors rather than policymakers become the driving force behind the ESG reporting structures and frameworks adopted, which has created uneven reporting for ESG metrics.
The absence of a strong regional regulator like the European Union (EU) has seen investors, rather than policymakers, become the driving force behind the ESG reporting structures and frameworks adopted, which has created uneven reporting for ESG metrics
The historic instability of the political and economic structures in some APAC nations, has created strong demand from investors for governance. As a result, governance datasets are strong when compared to the environmental and social scores, which are much weaker as they have become a concern only recently.
In fact, the social side of ESG, which is critical to many global asset managers and owners, is missing entirely in some markets. More advanced jurisdictions like China, Hong Kong, Singapore, Australia and Japan are issuing stronger guidelines that focus on climate and the environment, but many are still neglecting this aspect.
Market growth has brought some positive change. Most jurisdictions have now joined the global Network for Greening the Financial System (NGFS),4 which aims to share information about incorporating green finance into business across different central banks and regulatory supervisor organisations.
The International Financial Reporting Standards (IFRS) Foundation also recently introduced constitutional changes to their organisation that has enabled them to form a new board to introduce international sustainability reporting standards.5 This structure, called the International Sustainability Standards Board (ISSB), is due to be launched ahead of the COP26 UN Climate Change Conference in Glasgow in November 2021 and aims to provide a set of global standards for sustainability reporting that are on par with financial information disclosures.
This could force long term change on APAC, but the different speeds at which individual regulators are addressing ESG disclosure requirements indicate that the fragmented approach to ESG data in APAC will remain in the short to medium term.
Comparability is everything
The fragmentation in regulation is reflected in APAC’s ESG data vendor market, where there are multiple vendors, but none providing full market coverage.
Larger players, like MSCI, Sustainalytics and Trucost, provide data for public equities and fixed income, but even these global providers use inconsistent – and often opaque – ESG scoring methodologies, leading to a lack of correlation between ratings, as State Street Global Advisors’ analysis illustrates6.
This could force long-term change on APAC, but the different speeds at which individual regulators are addressing ESG disclosure requirements indicate that the fragmented approach to ESG data in APAC will remain in the short to medium term
There are gaps in asset class coverage to contend with. Prolonged low interest rates have seen many APAC investors focus on alternative assets in recent years, with AUM for real assets such as infrastructure, property and private equity in APAC reaching US$1.71 trillion as of September 2020, according to Preqin7. Most mainstream data vendors do not capture ESG ratings for these asset classes and more niche vendors have emerged to fill the gaps.
As a result of the fragmented landscape, comparability of ESG data – critical to informed decision making – is difficult. To overcome these challenges and achieve an aggregated view of the regional ESG metrics, large asset managers and owners need to purchase data from multiple vendors, which substantially increases costs. This leaves smaller investors, who may have to rely on one provider, at a disadvantage as they are unable to achieve the depth they require for their analytics. It becomes a balancing act between the data budget and the requirements of the investor.
There are operational challenges too, as ESG data from different sources derived with differing methodologies can’t be shared and analysed in a consistent manner across the front, middle and back office. This creates friction internally between portfolio construction and reallocation, risk management, and regulatory and voluntary reporting. It also adds to the consistency problems between asset managers and the asset owners they serve.
Ultimately, the disclosure of information to shareholders, clients and regulators on how investment decisions and reallocations are made becomes more complex, as does aligning investment decisions across asset classes based on ESG objectives.
Investors will, in practice, have multiple teams across the front, middle and back office requiring the ability to manipulate ESG data in different ways, which can pose governance challenges. An integrated platform that can draw on multiple data sources from reliable external providers, internal databases and proxies, and provide a consistent feed across the investment lifecycle, can strengthen governance
Flexibility and integration hold the key
There are no perfect answers to overcoming these challenges, but the right technology platform combined with careful management of data infrastructure and sourcing can deliver significant improvements.
Firstly, investors need to work closely with vendors to understand their methodologies, what their data represents and how that can be used in a reporting context. They can then select vendors that best meet their specific data needs.
Another key step is to implement a technology platform that is capable of consuming and standardising data from multiple vendors and in various formats. This can dramatically improve investors’ ability to customise ESG data based on their own requirements and to combine it with proprietary data produced by in-house analysts.
For example, while a data vendor may weigh all aspects of ESG equally in their scoring process through a combination of advanced software and an in-depth understanding of scoring methodologies, a standardised technology platform can help customise their data to give a more targeted view of a specific ‘E’, ‘S’ or ‘G’ factor that may be of interest in the investment process.
These capabilities are equally important for reporting purposes too. For example, an asset manager may need to report ESG metrics relevant to their alternative asset holdings on an absolute basis to an external investment monitor, but they may wish to report on a relative basis to investors. By utilising a purpose-built platform, they can combine their internal data with that from external vendors, and incorporate a relevant index. They can then quickly and easily manipulate the data to be able to report on an absolute basis, but also aggregate the data so they can report to investors on a relative basis against a benchmark target.
A long or short equity hedge fund that is trading in carbon emissions may need flexibility in how it reports its short positions. This same approach will enable it to include the short positions, to exclude them or to report them separately, as needed. It can also report the carbon emissions score of the fund over time as a relative number, or as an upwards or downwards trend.
As these examples reflect, investors will, in practice, have multiple teams across the front-, middle- and back office requiring the ability to manipulate ESG data in different ways, which can pose governance challenges. An integrated platform that can draw on multiple data sources from reliable external providers, internal databases and proxies, and provide a consistent feed across the investment lifecycle, can strengthen governance. Greater centralised oversight of the way teams use and report ESG data and metrics will help pave the way for enhanced ESG data governance policies.
Although investor pressure has led to the tightening ESG regulation and standards in many APAC jurisdictions, the landscape will remain fragmented in the short to medium term. Adaptation through innovative technology platforms and enhanced governance is critical for asset managers and owners looking to grow their ESG investments in this dynamic region.
1 Global Sustainable Fund Flows: Q2 2021 in Review, Morningstar, July 2021
2 MSCI 2021 Global Investor Survey
3 Sustainable Finance in Asia Pacific: Regulatory State of Play, ASIFMA, 3rd March 2020
4 NGFS membership page
5 Sustainability Reporting Journey: Proposed constitution changes to enable formation of ISSB to set sustainability standards, KPMG, 13th May 2021
6 The ESG Data Challenge: The Importance of Data Quality in ESG Investing, State Street Global Advisors, January 2021
7 Preqin Markets in Focus: Alternative Assets in Asia-Pacific 2021
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