Externalising research processes and the fear of unknown

The ESG/SRI research needs are growing and so are the cost pressures. To get more in less is on the rise. Specialized and value added ESG research is needed to take investing decisions for many investors who are genuinely inclined to make an impact through investigation or generate alpha. Therefore, it is important for buy-side and sell-side to re-think their research processes and costs. Finding a competent external research partner that can help them scale their research coverage and uncover niche investment themes at a competitive price, can really be one strategic move.

Small buy-side and sell-side companies can start by looking at what their larger peers did more than a decade back – engage with the right external research partners to bring scale and efficiency into their research functions. A specialized research partner can offer the following advantages:

1. Expand research coverage without investing in additional fixed cost, increasing head count and thereby increasing administrative time in on-boarding and managing;
2. Access to experienced analysts and teams at competitive prices;
3. Own analyst freed-up time to focus on outreach, new product ideas, and client development;
4. Benefit from best practices in the research process gained over the years;

And many more!

However, partnering with an external partner for research needs could seem new to many and the idea may seem daunting move. The companies may feel restricted for the following reasons:

1. Reliability of research output: Ensuring quality of the research could be difficult when conducted by an external research partner. It is dependent on various factors like, training, motivation, stability, etc. of the external research team.

2. Data privacy: Any mishandling of the data might have serious consequences for the companies. Two types of data are at risk here:

a. Non- public data collected from and about the firms that are part of the research process; and
b. Intellectual property of the company itself, such as methodology, new product development etc.

3. Coordination between the internal and external teams: Partners across geographical borders come with cultural barriers, language barriers, time difference, etc. Coordination may seem difficult and may increase administrative burden.

4. Skill set: A constant check on the skill set of the external team is difficult. This could directly impact the quality of the research.

5. Impact on employee morale: The internal teams could fear as it may negatively impact them when complex processes are given to an external research firm and they could become redundant. The impact on employee morale is an important risk and must be managed well.

Amidst so many fears, surprisingly, there are very few failure stories of externalizing research processes. Some of the big names in the industry have been leveraging this model successfully for many years now overcoming these challenges. While there is no “one size fits all” approach to these issues, some of the issues can be addressed by taking the following measures:

1. Identifying the strategic intent of the organisation and accordingly establishing the performance metrics to track the performance of the research partner. Quality check process can be defined by the organisation to ensure dependable results.

2. Defining Service Level Agreements (SLAs) can help in tracking and managing the operational efficiencies and quality.

3. Data privacy management: To ensure technological infrastructure and data are well protected, the information technology department must be involved from the beginning. They will also ensure that use of the data and applications is done by the research partners as was contractually agreed.

4. Phased engagement: Management of research process could be done in phases with complex processes/projects being externalized only after satisfactory experience of simpler processes/projects. This will also ease the barriers of culture, language, and time difference.

5. Internal team motivation: Clear separation of responsibilities between external and internal team is important. This will ensure that the company does not lose important talent from its own team. A walk-through of their role in maintaining the relationship with the external team and in delivering the final product will keep them motivated.
The above measures can smoothen the experience of externalising the research process. However, the first step remains believing in the system.

While there are challenges, the established benefits of such a set up are plenty. An improved access to large pool of skilled and experienced professional will not only provide competitive advantage to the organisation but also help get better research results at lower costs. With a positive and open mindset, companies can leverage all such benefits.

For more information on the topic, please contact: hello@sustainometric.com


Thematic benchmarks and ratings: an important tool for investors and companies

The ubiquitous influence of ESG factors has been present in the investment world for a long time now. However, the recent spur in the awareness and acceptance of the importance of ESG factors for companies and investors has led to a surge in thematic ratings and benchmarks. Some of the most valued benchmarks are Access to medicine, Access to nutrition, Corporate Human Rights Benchmark (CHRB), and Know the Chain. Investors and companies use these benchmarks to take informed decisions. Since, most of these ratings/benchmarks are developed by non-profit organizations, there is a constant pressure of optimizing their spending on research. Therefore, partnering with specialised research firms could provide them quick access to skills and at the same time make their research processes lean and efficient.

The need and opportunity for transparent and trusted ratings and thematic benchmarks will continue to intensify with the rapid growth of ESG based investing. Some of the successful names are:

1. Access to medicine Index

The Index analyses 20 of the world’s largest research-based pharmaceutical companies on how they make medicines, vaccines and diagnostics more accessible in low and middle-income countries. It is a product of two years cycle including the review of results of previous cycle, consultation with expert stakeholders to improve the methodology for the next cycle, data collection, verification and analysis.

2. Access to nutrition Index

The Access to Nutrition Index (ATNI) rates 20 food and beverage manufacturers´ nutrition- related policies, practices, and disclosures worldwide on a recurring basis with an objective ‘Spotlight Indexes’ that score and rate the ten largest Food & Beverage manufacturers in each Spotlight Country. Methodologies for the Spotlight Indexes are adapted to fit national realities and give insight into how companies perform in specific markets.

3. Corporate Human Rights Benchmark

The Benchmark provides a comparative snapshot year-on-year of the largest companies, looking at the policies, processes, and practices they have in place to systematise their human rights approach and how they respond to serious human rights allegations. This is to prevent adverse impact of competitive nature of the market on the workers. The benchmark ranks 98 of the world’s largest publicly traded companies, from 3 sectors (Agricultural products, Apparels and Extractives), on 100 human rights indicators.

4. Know the chain

Through benchmarking current corporate practices and providing practical resources that enable companies to operate more transparently and responsibly, KnowTheChain drives corporate action and investor decisions in order to understand and prevent forced labor risks within their global supply chains. Know the Chain published its second set of benchmarks in 2018 covering more than 120 companies. Their benchmarks are Information and Communications Technology, Food & Beverage and Apparel & Footwear.

5. Fair Finance Guide International

The Fair Finance Guide International coalitions have developed methodology to asses and monitor bank policies and practices towards social, environmental, and human rights. These are used for communicating with the banks, informing the public and for better democratic oversight of the financial institution. There methodology covers 23 themes/sectors & over 422 international standards and is regularly updated using the experience and expertise of all coalition members worldwide. In 2017, policies of ninety-five financial institutions in nine countries have been assessed against this methodology and over 45 case studies have been published, in the countries where a FFG operates, comparing policies with practice.

These ratings have evolved to become an indispensable tool for investors as they provide a proxy for a company’s external costs and benefits based on rating and ranking of theme specific performance or/and multi-theme composite performance. With this critical analytical information, investors can spot best performers with better risk management towards current and future regulatory, physical, human, and other risks arising from ESG factors like carbon control, minimum wage laws, etc.
Further, the reputational and competitive advantage of these ratings and benchmarking motivate companies to improve strategies towards various issues. Thematic benchmarks and ratings could help companies be more aligned with the urgent global sustainability agendas

These benchmarks are mostly funded by NGOs or governments. Due to limited funding available, these organisations are under constant pressure to optimize research and expand coverage. They often lack other reporting skills to present their findings in the most effective format for investors, companies, and other stakeholders. Hiring an external partner that can offer reliable, innovative and cost-effective research support, that can go a long way in dealing with some of the obvious challenges such as seasonality of research, expanding coverage, and optimize costs. At Sustainometric, we help rating/benchmarking organizations to improve research processes by:
Building automation;
Designing dashboards for data dissemination for a diversified set of audience;
Data collection and analysis.

For more information, please contact: k.mishra@sustainometric.com


ESG research and state of automation

As the adoption of sustainable investments is on the rise, ESG data and the means to harness it, has become a must-have for ESG investors and index providers. In the quest of gathering quality and comparable data, investors and index providers are seeking integration of machine learning into the data collection process. However, the state of automation is not fully matured in this area due to various limitations. Nevertheless, there are certain possibilities for small automations. Individually these automations can bring small efficiencies however collectively and on a large scale it can lead to substantial savings in costs and improves data quality.
The cost of gathering and analyzing ESG data is a major barrier to using ESG information for investment decision-making. Therefore, the industry is looking out for solutions that can make ESG research more efficient, affordable, and scalable. Many companies are focusing on machine learning to capture the most structured reported numbers. However, as of now, even the ones who are claiming to have developed machine learning, still spend lot of manual time in processing ESG data. Nevertheless, if successfully implemented this could make the research affordable for all.
There are certain challenges in developing automation tools for ESG data:

1. Unstructured/Incomplete data:

Unstructured or incomplete data that are often incomparable across firms, industries, and sectors. Unstructured data include texts, pictures, multimedia content, online reports/presentations, etc. Collating data of such different types without manual work is currently not possible. Moreover, the data is also often found incomplete for automated collection and analysis.

2. Irregular reporting by companies:

Different companies follow different cycles of reporting including annual reporting, biennial reporting, triennial reporting as well as irregular reporting of quantitative data. This makes extraction and storage of data in automated matrix difficult.

3. Complexity of Data:

Data is often not reported in units and metrics required for analysis. This compels some level of manual work in analysis. Therefore, complete automation is difficult. For example, as Health & safety KPI, some companies report LTIFR, some report loss time injuries, some report total injuries, etc. To enable comparison across such companies, certain assumptions and calculations must be made manually.

4. Qualitative Analysis:

A significant part of the analysis is dependent on the qualitative data available. With multiple keywords for a particular aspect, automation becomes very difficult as it would not only involve extracting all the information with the relevant keywords but also sorting through this information to derive a conclusion.

5.Reporting based on different reporting instruments:

There are more than 400 mandatory and voluntary reporting instruments, and automating comparison of ESG performance of companies, that follow different instruments, is difficult.
Nevertheless, as sustainability reporting matures, the ease of collecting and analyzing ESG data will improve. This will also enable sophisticated solutions for automation of collecting and analyzing ESG data. Till we reach there, there are certain possibilities for small automations. Individually these automations can bring small efficiencies however collectively and on a large scale it can lead to substantial savings in costs and improves data quality. For example:

  • Automated trend calculation for various sets of quantitative indicators.
  • Automated graphical presentation of KPIs.
  • Automated data conversion from one unit to another.
  • Automated normalization of data to make it comparable over the years and with other companies.
  • Automated linking of quantitative data on two different metrics to calculate ratios, percentages etc.
  • Automated comparison of company’s performance with policy goals like the SDGs to understand the progress towards them and to identify areas that need focus in order to avoid current/future regulatory risks.

Studies show that the next stage in ESG research process would be to study the causal correlation on how previously distinct strands of ESG data and analysis relate to or reinforce performance in each other. With the above automations in place at this point of time, implementing the emerging stage would also be easier in the future.
At Sustainometric, we focus on understanding clients’ current research processes to make it lean, efficient, cost effective, and scalable. To know more about us, please contact : hello@sustainometric.com


ESG research possibilities for index providers and investors

ESG factors have become significant part of conventional as well as alternative investments. With studies showing material impact of ESG factors on the risk-return profile of investment portfolios, investors are increasingly focusing on sustainable and responsible investments. Index providers and investors are developing ESG parameters that can be used in the construction of indices and in the development of socially responsible investment products. However, the state of data available and the complexity of processing the raw data to fit their requirements could be a challenge.

Therefore, intensive ESG research processes are designed where the available data is standardized and structured to suit the requirements for developing new index funds and/or investment products. ESG research can be used to build portfolio of sustainable products based on different techniques: screening, integration, sustainability themed products, impact investing, etc.

There are various possible arrangements available for ESG research for index providers and asset managers:

1. Sourcing processed data and analysis from ESG data providers:

There are many ESG research firms available that sell off-the-shelf ESG data as well customized data. It is a cost-effective source of ready ESG data. However, the available data or research may not suit clients’ requirements completely. A 100% customization of the research could be a constraint. Such a database is used and is further analysed by the internal teams of the index providers or asset managers to suit their need.

2. In house ESG research

Setting up an in house ESG research team is an option chosen by many index providers and investors. While this set-up provides flexibility to design the research as per own beliefs, it has its own challenges:

  • Scalability: The research is labor intensive and scaling the coverage isn’t always easy.
  • Quality of research: Some index providers and investors also hire interns for data collection on a yearly basis. The year on year comparability of data can be difficult due to subjectivity involved in the research which is conducted by different interns every year.
  • Aanalyst’s monotony: ESG research processes are intensive, repetitive, and monotonous. Engaging and motivating ESG analysts could be a challenge for most of the index providers and investors.
  • Training: Training of new analyst/interns is a time-consuming process.
  • Cost: Hiring and maintaining a team for ESG research analysts adds up to the research cost tremendously.

3. Hiring specialized ESG research firms

Another option is to hire a specialized ESG research firm that has experience in ESG research. This addresses some of the issues highlighted in the other arrangements:

  • Customization: The research can be 100% customized to meet the clients’ requirements. The service providers can also hire analyst based on clients’ requirements and hence improve research output.
  • Access to trained analysts: Asset managers and Index providers get ready access to ESG trained analysts hence reducing time to market. There are no new-recruit delays, because the staff are already experienced and well trained. The time-to-market is also reduced due to quicker start-up times.
  • Standardization: One team handling the research over longer period of time helps in achieving standardized results and streamlined processes.
  • Scalability: The ESG firms generally maintain shadow analysts to scale up the work if required with a short turn around. Asset managers and index providers can get research done without increasing the number of employees on the payroll.
  • Cost efficiency: Costs are reduced in a number of proven ways. Recruitment and ongoing permanent commitments are reduced due to lower number of research analysts to maintain and retrain. Other overheads are reduced as well. Hiring full time employees can be expensive especially if research needs are fluctuating. Service providers can provide flexible research capacity according to its needs in different periods.
  • Best practices: Asset managers and index providers get access to best practices gained by the ESG firm through experience by working with different clients.
  • Strategic benefit: Getting a part of ESG research conducted by a specialized firm enables investors and index providers to focus on core, value-adding activities such as company engagements, developing new products ideas, outreach, etc.

Careful evaluation of the above options could provide a perfect solution for ESG research. At Sustainometric, we work with our clients to understand their challenges and customize our research solutions that best suits their requirement. For more information on Sustainometric and its offering, please contact info@sustainometric.com.

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