Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client LoginClient Login

Subscribe to Asset Servicing & Fintech Insights

Discover more information in our monthly publication, the AXIS newsletter, including industry trends, product innovation, Fintech and more from our team of experts.
SUBSCRIBE NOW
November 7, 2021

In the Absence of a Shared Standard, How Can You Maximize ESG Data?

For institutional investors hoping to act on ESG goals, data is the name of the game. But investors will have to ensure they have access to the needed data, as well as the ability to draw insights from it.

By Paul Fahey

Across the industry, we’ve seen an increase in the number of asset managers who have committed to utilizing ESG data. In fact, according to “Art of Alpha: It’s All About Investment Data Science”, a survey of asset managers by Northern Trust and WBR during Q2 2021, well over half (59%) currently factor ESG data into their investment process.

As more managers and investors target sustainability goals, the demand for ESG data has grown. Transparency and accountability are the foundation of ESG investing, and managers feel the pressure – whether based on regional regulations or investor demands – to demonstrate that their products are, in fact, green, and not greenwashed.

While today there are multiple vendors that offer access to ESG data, there is still a lack of shared standards around what datasets are tracked, how they are tracked, and how to draw out and act on insights from that data.

Without a shared industry standard of ESG analysis and reporting, acting on these pressures has been challenging for institutional investors, and many questions have arisen as a result. How can they make their small sustainability investing teams work smarter? Can they access the needed data to drive portfolio-level ESG decisions? What signals can they derive from the data that will help guide these decisions?

Four applications for the broad, non-standardized world of ESG data analytics

Armed with the right data, responsible investing teams have to know how to apply it to produce actionable insights. Institutional investors are making plans for where their ESG data and insights will be coming from in the future – according to a Northern Trust webinar poll held in October 2021, 49% are hoping to partner with a main service provider. A quarter (26%) hope to manage ESG data and insights internally with direct data relationships

No matter where firms concentrate their ESG data relationships, a properly data-supported investment strategy will allow institutional investors to leverage the following applications to meet their ESG goals.

  1. Screening – Screening securities for ESG performance is likely the most common and straightforward way of using ESG data to date, involving analysis of certain ESG factors of a company before deciding if it’s a fit for a portfolio. However, managers should be sure they have the capacity to go deep on their screening, including comparing multiple securities to understand their impacts, especially across the different segments of environmental, social and governance, and across industries. For example, comparing the ESG score of a credit card company with an electric car company may feel like trying to compare apples and oranges at the surface. Clearly the environmental factors of the car company weigh heavier on its score than that of a credit card company who makes social elements of ESG a priority for their structure and operations. The right data solution should allow you to analyze and weigh these different factors on a level playing field to understand which one truly is the better fit for your ESG goals.
  1. Understanding risk and performance drivers – As asset owners begin defining their own ESG goals and benchmarking against them, they will need to grasp how their asset managers’ decisions are aligning with those ESG goals. Asset managers have been and will continue to feel this pressure from investors that ask for customized ESG reporting on very specific responsible investing angles and considerations. For example, one investor may put special emphasis on gender equality risk while another cares primarily about carbon emission risk. Being able to quickly pull custom data views on different holdings will be crucial to gaining investors’ trust and cutting through their concerns of greenwashing.
  1. Portfolio optimization and simulation – When managers and self-managed asset owners bring new ESG focuses to their strategies and as they hope to see ESG-friendly returns over time, understanding how changes would affect their portfolios before the trade is crucial. Firms should seek data tools and feeds which allow them to simulate changes to their portfolio and understand how they affect different ESG scores surrounding their portfolios.
  1. Tracking change within specific holdings – For managers or self-managed owners who wind up taking an activist stake in an issuer and hope to see it improve not only in value but on an ESG front, the ability to access relevant ESG metrics for the organization as well as track change over time will allow them to hold management accountable to the ESG-focused promises they make to their stakeholders.
  1. Reporting and benchmarking – A post-trade view on ESG investment decisions assists investors in taking a big-picture, hindsight look at how they’re adhering to their ESG goals and how they progress over time. With the right reporting approach, they can view rates of return or contribution by E, S and G ratings or view aggregate scoring, as well as track relative performance of each ESG pillar over time to understand the effectiveness of high vs low scoring allocations. Having this kind of big picture view allows them to adjust their investment decisions to bring them closer to achieving those goals.

To keep up with the many pressures that are emerging as ESG becomes a bigger consideration, relying on data to make decisions and to communicate those decisions to stakeholders will be key.

Aside from manager/investor pressure, as ESG remains a focus, regulatory frameworks are likely to emerge, and managers and investors will be ahead of the curve if they focus on how to put ESG data to work now.

Getting ahead of the curve and making ESG a priority in one’s portfolio and operations can’t be achieved without the right tools and partners. With this in mind, institutional investors committed to an ESG-centric future within the industry should find their key partners now.

Paul Fahey portrait

Paul Fahey

Head of Investment Data Science, Asset Servicing, Americas
As Head of Investment Data Science, Paul works with asset managers and allocators to better understand the investment decision process and to improve future decision making. Partnering with expert fintech firms to leverage the power of data, behavioral analytics, investment analytics, and Northern Trust’s peer universe data to drive meaningful improvement to their investment strategy.
READ BIO

Confidentiality Notice:  This communication is confidential, may be privileged, and is meant only for the intended recipient.  If you are not the intended recipient, please notify the sender as soon as possible.  All materials contained in this presentation, including the description of Northern Trust, its systems, processes and pricing methodology, are proprietary information of Northern Trust. In consideration of acceptance of these materials, the recipient agrees that it will keep all such materials strictly confidential and that it will not, without the prior written consent of Northern Trust, distribute such materials or any part thereof to any person outside the recipient’s organization or to any individual within the recipient’s organization who is not directly involved in reviewing this presentation, unless required to do so by applicable law.  If the recipient is a consultant acting on behalf of a third party client, the recipient may share such materials with its client if it includes a copy of these restrictions with such materials.  In such event, the client agrees to comply with these restrictions in consideration of its accepting such materials.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret) [VAT if applicable], address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.