Five tips for automating ESG in the investment process

Investment Technology

Five tips for automating ESG in the investment process

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The rapid growth of sustainable and impact investing is accelerating and the buy-side is making a concerted effort to respond to the needs of their clients. Early in 2020 Deloitte asserted “ESG-mandated assets in the United States could grow almost three times as fast as non-ESG-mandated assets to comprise half of all professionally managed investments by 2025.” In addition, a September 2020 survey conducted by JPMorgan Asset Management asking investors about their ETF usage found 72% of respondents predicted there will be “strong growth” in ESG ETFs while 52% said thematic ETFs.

The growth in strategies, funds, and products that focus on environmental, social, and governance (ESG) factors is forcing investment managers to blend ESG measurement, reporting and risk analysis increasingly into their daily processes.

There are many challenges with how ESG factors are measured, how ESG is evaluated for effectiveness within overall strategy, and how the resulting impact on P/L and performance is tracked. With the right processes in place, you can systematically track ratings, their component factors, trends, performance patterns, and tie those results to valuable investment insight.

In order for an ESG strategy to be effective you need to be able to track it from initial research through to investment selection, execution and performance analysis.

As most firms evaluate ESG differently, use disparate systems throughout the investment process and use a significant amount of manual effort to produce ESG reporting, it can be challenging to automate ESG into the investment process. But there are some quick wins that can be had. We set out five tips to help you streamline ESG into your investment processes:

1. Effectively access a consistent issuer hierarchy from front to back office

Why would you need this? A consistent hierarchy allows you to set a rating assignment at every level of the issuer hierarchy and track it from investment analysis through to performance. You can then be dynamic in aggregating by underlying company factors or by ratings from different sources.

2. Track ratings and underlying factors from all relevant sources

By gathering preferred sets of ratings, you can then configure reports by the audience using any preferred ratings agency. It also lets you establish proprietary ratings based on weighted average ratings from multiple providers or your own sources in a similar manner to credit rating aggregation and normalisation across multiple agencies.

3. Ensure ratings and factors can be tracked in time series

Tracking ratings and factors in time series enables you track associations between ratings and underlying factors over time. You can easily identify ESG rating patterns and potentially unlock hidden information in trends from the underlying factors.

4. Ensure ESG ratings are centrally stored so they can be accessed by research, order management, portfolio, performance, risk, and reporting systems

Centralising ESG ratings within the golden master investment data store is standard industry practice. Making the entire investment data set instantly available to all systems and processes that need it is the challenging part. Storing your investment data, including ESG ratings centrally and providing access via API, Web interface, and even via an Excel plug-in lets you seamlessly use that data throughout your investment process.

5. Automatically derive proprietary insight and drive value

Integrating ESG ratings and factors and linking them throughout the investment process lets your research and insights flow from the front office through the entire decision, execution, allocation, and performance measurement chain while providing a platform for generating automated insights. These insights can encompass everything from top performing ESG factors, proprietary ESG ratings performance, best-ex between ESG factors through to P/L per ESG strategy.

If you want to find out how you can apply these tips to your own investment data process to give you proprietary insights into the ESG investment process, get in touch with us.

Additional resources:

Deloitte report

JPMorgan survey

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Christopher Goodreds



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