Integrating ESG Data into Portfolios – Points to Ponder

Integrating ESG Data into Portfolios – Points to Ponder

The ESG factors that influence portfolios are diverse and numerous. Here are a few points to ponder when integrating ESG data.

Author: OTCFin –


The ESG factors that influence portfolios are diverse and numerous. Take sustainability, for example. Carbon neutrality, waste management, water, and air pollution are just a few of the key subcategories that may materially impact some investments’ financial performance, in addition to their environmental impact. In 2018, the number of global sustainable investing assets reached a whopping $30 trillion, increasing by 34% from the past two years. Investors are now the influencers of sustainable actions, actively supporting the ESG initiatives, and holding companies accountable.


-Stricter Regulations
An increasing number of government agencies around the world are actively conscious of climate change and taking concrete actions towards combating it. One such example is the EU Action Plan on sustainable finance released in 2018 by the European Commission to direct capital flows towards sustainable investment. The EU Action Plan included establishing an EU classification system for sustainability activities and creating standards and labels for green financial products, and standardizing definition of sustainability in the risk management aspect.


A significant shift toward stricter governance is not limited to the E factor of ESG. A clearer set of regulations are being established to ensure fair labor practices, and product safety, both of which make up the Social factor of ESG policies. Outside of the EU, the California Transparency in Supply Chains Act, the UK Modern Slavery Act, the Australia Modern Slavery Act, and the UN Guiding Principles for Business and Human Rights are the legislations and regulations aimed at improving the labor practices and providing transparency. Governance factor that concerns principles like board diversity, executive pay, business ethics, and especially data security requires a change and an establishment of a more transparent set of rules. With the rise of the digital era, the illicit act of corruption and fraud can cause immense reputational and legal risks on business activity. A need for rapid development of new and tougher regulations on anti-fraud has been expressed from the investment community. The regulations that surround sustainable investments are expected to get stricter to move the industry towards positively impacting all of the E, S, and G components by the investment actions.


– A New Risk Factor
Over the years, investors have observed that environmental, social, reputational, and legal risks all have the potential to impact the returns of companies materially. While the level of risk differs on a case-by-case basis, screening the indicators that materially affect the business’s performance and engagement with the company are two crucial steps that can protect the investments’ future value. This trend is not only occurring amongst asset managers but across the financial industry: Rating agencies, although varying by company, use ESG data to influence ratings. Banks are increasingly including ESG factors as additional criteria to consider in their financing activities.


-Diverse Data
With the availability of numerous ESG rating and data providers, an asset manager’s ESG journey often starts with an education of the various methodologies alongside an internal assessment of their ESG strategy. The underlying ESG data supporting ESG scores or ratings are vast and may be challenging to incorporate within the asset manager’s usual investment making process.


OTCFin’s comprehensive EDM platform has a proven track record in supporting our asset manager clients’ risk & regulatory data management and reporting needs across all asset classes. With the extension of our data model to support ESG data, we help accelerate our clients’ incorporation of ESG factors in their decision-making process alongside traditional financial factors. For more information on how we may assist in your ESG journey, please contact us for an initial consultation and demo.

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