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: materiality & impact investing, thematic investing, ESG benchmarking & screening, 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 firstname.lastname@example.org.