ESG Investing: The Data Challenge

Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe.

Today’s podcast features Frank Talsma, Director of Risk and Investment Analytics at RBC Investor & Treasury Services, discussing how asset managers are adapting to the rising prominence of sustainable investing.

Thanks for joining us, Frank.

Frank Talsma: Thank you for the opportunity, Murray.

Murray Bender: Based on your experience, Frank, what challenges are asset managers facing in incorporating sustainability into their portfolios?

Frank Talsma: Having been for 15 years in the industry and focusing on analytics and data solutions, the ESG revolution we are currently facing is one of the most fascinating things happening.

ESG is a very complex topic. It’s data intensive. And it’s a world where norms do not exist, right? So it’s something that’s been—ESG and sustainable investment has been a niche for years. So we have some very savvy asset managers, ESG-savvy asset managers that have been having a tradition in investing in ESG.

But what we’re really seeing now is that it’s becoming the norm. And we have a gradual kind of integration. And it really started to kick off, I would say, in the 2020s. And this is driven by a number of factors, like first of all, investors asking for ESG and asking for products that basically make them feel good in terms of their impact on the ESG matters and on climate.

But also, and this is I think something I will focus on, is the regulation. But the main challenge really the industry is facing is to tackle ESG in a standardized, transparent, and comprehensive way, right? So each of these three aspects are equally important and equally challenging.

And the foundations really around ESG investing and monitoring, which is also very important, are being laid as we speak. And you can really—the industry is currently kind of shaping itself and structuring itself around ESG. And it’s fair to say, even though there is now a real momentum, but we are still far away from a unified framework, right?

So against this backdrop, it’s clear that asset managers are at the heart of this, and there is lots of opportunities and challenges. You can look at ESG, at its core, it’s a massive data challenge, and there are still many gaps in terms of data availability and data consistency. And you can see this by some of the key data vendors. And there’s actually hundreds of ESG data vendors out there, but there’s probably around 25 bigger ones. And if you use ESG ratings or metrics, they give very different results. And this is clear because of different methodologies and different choices, different data inputs. And also, there is simply not enough reliable data.

So I think this is a common challenge for everybody. And that brings me to one of the key things is, it’s obviously a challenge for asset managers, but it’s also impacting investors because it’s difficult for them to compare ESG information if you don’t have a consistent source of data, if there’s not a standard.

So that is a challenge, and we’ll see how the industry is facing that through some of the initiatives. But I would say, what asset managers are really feeling now is that investors are asking different types of questions than they would previously do. So you have your standard kind of fact-sheet information around performance, around risks, around your top holdings and things like that, which is of course key information for any investor, right? And then, some institutional investors will ask for more information and you’ll need to provide attribution information and things like that.

But increasingly now, there will be questions around, okay, what is my carbon footprint, for example. And I’m investing in a low-carbon fund; can you actually show me how this fund reduces emissions? Answering these questions more on impact is something very challenging, and it’s going to, I would say, drive the industry going forward.

So I’d say asset managers are different levels of maturity in terms of their ESG journey. There’s a large spectrum from ESG aware, negative or positive screening, all the way to full inclusion and impact investment, right? But then we will see that even though there is these different levels of sophistication of asset managers, you have everybody’s faced with this lack of global standards. And this is something that we will address through some of those initiatives we are going to speak about.

Murray Bender: So you briefly mentioned regulation. What’s being done by governments and the industry to deal with some of these issues that you’ve just talked about?

Frank Talsma: I think the regulators basically realized it’s the wild west out there. But even in the wild west, you need a sheriff, right? So, the regulators are stepping in and saying, okay, we need to regulate ESG; we need to provide the common framework or a common standard around ESG investment and ESG monitoring. And obviously, that’s a very ambitious thing to do.

So there are a number of initiatives that are happening, in Europe most of all. I would say Europe is a bit of a catalyst from a regulatory perspective. And the world is watching what’s happening in Europe with regulations like SFRD (sic) [SFDR], which stands for Sustainable Finance Disclosure Regulation, and taxonomy, which try to give common standards around reporting and also about defining what is actually a sustainable investment, because there is very different views on that.

So it’s really helping to drive standardization and combat what is known as greenwashing, so funds or products that say they are ESG but actually they’re not. So making sure that it delivers what it says on the tin, I think that is key.

 And the other area that really the governments are promoting, obviously, is the transition towards a greener, cleaner, low-carbon economy, and meeting those Paris Accords and as well as the European Union Action Plan to become a net-neutral economy by 2050, right? So in order to realize that plan, they want to redirect capital towards sustainable activities. So that is kind of a long-term—to promote long termism and financial—sustainable investment for the economy. So I think that those are some of the motivations around the governments.

Practically, what it means is that there’s lots of challenges. Because when you look into the detail around some of those proposals, it’s hundreds and hundreds of pages of technical detail that all asset managers, certainly in Europe, with the proposals have to adhere to. So it doesn’t matter whether you’re an ESG investor already or you have not really been giving ESG much priority until now, you will need to deal with ESG. You will need to disclose information to your investors on some of those principle adverse indicators.

So what we are seeing now is that all of this is taking real—is really important, and it’s obviously done for the right reasons, but we see that there’s a sense of urgency around the political agenda. At the same time, it’s a very complex topic, so what we’ve recently seen is some of those deadlines and timelines and have been shifting out a bit. And there’s been some delays because of industry lobbying, but also because the European Commission themselves realized that they need more time to put forward the right guidance and the right requirements.

You can think about it like this. What happened was that, in Europe, we have the Level 1 requirements, which is, basically, you getting a car. And then what we’re missing is information on how to drive the car. That’s the Level 2. So I think that’s what the industry is waiting for.

In the meantime, we’re a little bit in a grey area in terms of, okay, what do we need to do, how do we need to adapt. And everybody is reviewing what’s out there in the market, having discussions with different vendors. Fintech’s obviously very much involved in this space. You have lots of consultations happening. So it’s a very, very interesting period for the whole industry to structure itself around the requirements for ESG today and going forward.

Murray Bender: So it certainly seems like there’s a lot of new regulation. What challenges are asset managers experiencing in terms of adapting to this new complex regulatory environment?

Frank Talsma: I think, Murray, you mentioned it, right? So first, there’s the regulation itself, and then I would say there’s the data. So I would say, I’m just going to simplify to those two aspects.

So, the regulation itself is very complex. So it’s really, if I look at it, one of the most complex texts, certain part of it that I’ve seen, and I’m talking particularly about the taxonomy in Europe. And it’s interesting because, essentially, there are still debates even between the countries in terms of what is considered sustainable and what is not. Think about, for example, nuclear energy. So, France uses a lot of nuclear energy, and they think it’s a good thing. Germany has a different opinion. So how you get towards an agreement within Europe on some of these examples is already complicated at that level. But then for asset managers, how do they comply to something that is still a moving target is, I would say, a challenge.

So I think there is the realization that you have to do something, but it’s not going to be perfect. But you certainly need to put in place now the right solutions in terms of sourcing relevant data on your portfolios, and also being able to meet those reporting requirements, whether they are regulatory, and there are some of those are predefined, but as I said, still in consultation, or really based on what you need to disclose to your investors. And you need to make sure that you put the right information into the hands of the people that need it. I think that is a challenge.

And if you just look at the data itself, obviously, there are large discrepancies and differences in the quality of the data. But I would say, what we really see is that corporates will disclose more and more information about ESG, like carbon footprint data, but various data points around ESG. And they are basically forced to do so by some regulations and also by industry pressure.

So I would say, as it is today, there are still lots of gaps, certainly if you look at different asset classes or different regions, like fixed income is always more difficult than equities. Also, private assets, obviously, very different approach is required there, but also OTC derivatives, in order to really cover the entire portfolio is a big challenge. Also, government bonds is something that has currently been excluded from taxonomy. So there are still many gaps. But at the same time, you need to report, at the portfolio level and an entity level, your ESG and also your taxonomy.

So how do you deal with those gaps and those data inconsistencies? Do you need to recruit more analysts to do a fundamental analysis? Or how will you deal with that? And knowing that it could be a relatively short-lived problem as corporates are going to disclose more and more information and data, and most of that will be in the public domain, which are some initiatives to have global or European-level repository of all this climate and ESG data, which is, of course, very welcome to the industry.

Because when you look at it, the amount of money that is being spent only on ESG data is huge. So large asset managers, it’s not uncommon to spend multiple millions just on ESG data, and that only gives you the data. You still need to extract all the reporting and all the insights from that data, and you need to have the right people and the right resources to do so.

So I would say data is a part of the challenge, but it’s probably currently driving 80% or something like that in terms of the cost, which, hopefully, in the future, will be a bit less as more information gets disclosed by corporates and as regulators are looking more for the raw data points rather than ratings, for example.

But obviously, there are different use cases, and you need to make sure that you cover off your front-office use cases but also your regulatory use cases, which is common for everybody.

Murray Bender: So finally, Frank, can you provide your perspective on some of the learnings around sustainable investing and how you see this area evolving as we move forward?

Frank Talsma: Taking a step back again, I think what we’re seeing is, ESG is going to become the new norm. It’s not a choice. You have to be able to meet ESG requirements, to answer those questions, to meet the regulation, to satisfy the demand that we’re seeing in the market from institutional investors like pension funds, insurance companies. So, it is massively important, and it is basically foundational to protecting your core business. And obviously, a lot of money is looking for ESG.

But at the end of the day, when we look forward, it’s like ESG as such will no longer be a differentiator because everybody has to comply. But it’s going to be like, what can you add on top of that? Do you have different strategies that you can sell? Can you really show impact? Can you do real reporting and provide your investors with the real insights that they are looking for? And obviously, you need to meet the regulations. But everybody will have to meet the regulations, so that’s not something you can compete on.

So I think, going forward, it’s going to be some of those questions. And really, at the end of the day, it’s about what really matters. So we need to measure what really matters, and we need to have also the right information there. And I think, for the time being, as I said, the biggest hurdle is still poor data availability and quality. But that should be a gap that will be closed in, let’s say, the next two to five years so that we can get really this kind of more harmonized, global standard, which is really, I would say, the biggest benefit to the overall industry.

And one follow-up is, as I started my remarks is in saying ESG is very complex, it will need time. We are at the start of this journey. Think about it. It took about 20 years of debate to get to common accounting standards. And with ESG, in my opinion, it’s actually far more complex than accounting standards because it’s nonfinancial information, it’s very broad, it covers multiple areas, the E, the S, and the G. So getting towards a common standard there will take its time.

But the question is, do we have that time? Because we have very important and lofty targets in terms of becoming net-neutral, in terms of protecting the environment, which are very important, and we all need to work towards those. So there is a sense of urgency, and there’s real opportunity to move forward and to help save the planet.

Murray Bender: Thanks for your time, Frank. We really appreciate it.

Frank Talsma: Thank you very much, Murray. It has been a pleasure.

Murray Bender: Today’s podcast has been brought to you by RBC Investor & Treasury Services, and we hope you found it useful. For additional insights on the future of asset and payment services, including our previous podcasts, visit

I’m Murray Bender. Thanks for listening.

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