Author: OTCFin – otcfin.com
Although incorporating ESG factors greatly helps with portfolio modeling, ESG factors aren’t currently standardized and are often hard to measure. They will impact future returns and, consequently, corporate value. Hence, understanding some of the challenges that a portfolio manager may come across can better prepare them to integrate ESG as an essential part of portfolio strategy.
– New Fields with Less Information
Despite ESG becoming what seems to be the trend of the decade, the integration and reporting of ESG data are a relatively new phenomenon for most investors. Companies actively started paying attention to ESG in recent years as the responsible operation’s demand has increased. An ample amount of research has been done, mainly by the leading large-scale firms in the industry; however, the mesh of various scoring, analysis, research, and disclosure methods make it hard for institutional investors and asset managers to obtain usable information to help manage their investments. One of the on-going issues is the lack of standardized ESG structure along with reliable & high-quality data
-Lack of Standardized Model
The inconsistent data model has been an obstacle to efficient portfolio construction and advancement towards responsible investment. Despite numerous companies attempting to report on their sustainable business performance, meeting the criteria is challenging given the over-abundance of requirements and lack of consistent reporting standards and platforms. Portfolio and Asset managers face the challenges of evaluating a wide array of sustainability reports, documents, filings, and websites, further adding to the confusion of ESG integration.
-The Need for Additional Resource
Initially, the ESG framework was only used among impact investors. However, with the framework gaining more recognition due to changes in regulations, all types of financial organizations are faced with the need to adopt an additional training system or establish a specialized, internal ESG analysis team. Frequently, the issues with such teams are; lack of familiarity among the management and the team about ESG/SDGs issues, consideration of ESG as an extension of CSR, and the difficulty of understanding and implementation of the ESG information into the decision-making process.
Hence, when it comes to ESG adaption, it is important to ensure that the team is properly integrated into the investment decision process to take concrete steps.
– Backward-looking Nature
Finally, another challenge when considering ESG data integration is its nature of being backward-looking. Inherently, what matters most to the investors is a forward-looking view. Essentially, ESG integration ought to ensure that the portfolio managers have the tools and framework to understand non-financial factors’ materiality and how these factors affect the returns. The problem with being backward-looking is that it fails to capture the company’s present ESG activities or plans for future improvement. Additionally, it is essential to be reminded that companies with high returns today may not be those with high returns in five years. The same goes for companies with high ESG scores.
While challenges remain upon integrating ESG factors, better ESG incorporation is possible with data and innovative technology. OTCFin’s approach is to customize our platform to suit each company’s needs to have a solid insight and a good understanding of ESG integration. Our skilled staff will guide you to understand the ESG data better and assist you in data integration. Get in touch with us for an initial consultation/demo session.