Public companies and investment firms tend to operate in a way that is in keeping with the preferences of their shareholders. More recently, an increasing interest in environmental, social and governance (ESG) concerns has prompted companies to include those practices in their investment decisions and principles. This presents a growth opportunity for investment managers, as well as significant challenges. Managers must be well-versed on the issues to have a meaningful dialogue with investors, and they must be prepared for emerging regulations, which shift as new research and data become available. To meet these challenges, many look to systemic solutions that integrate ESG metrics into their processes.
The future of finance is rapidly changing with the proliferation of ESG investing. The rise of ESG has led to increased demands by investors for transparency and new regulatory reporting requirements. With multiple jurisdictions around the globe, the task of staying abreast of every regulation can be daunting for many asset managers. They also face pressure from investors and regulators to explain how they integrate ESG into their processes and what metrics they use to monitor and manage ESG risks in their portfolios. Without a clear standard for defining, measuring and reporting on ESG, most asset managers look to the more than 100 vendors providing ESG scoring, rating and reporting services. To help standardize ESG transparency reporting, the EU deployed several new regulations, including the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation. While additional ESG reporting in other jurisdictions remains informal at the manager or product level, the demand for providing and meeting transparency disclosures is ever-present. With the need to ensure managers address ESG risks and climate change, ESG integration in all financial reporting is not far away.
Investment managers need analytic and reporting tools that enable them to manage risk exposure and meet investor expectations for transparency, as well as the ability to synthesize data from various providers while meeting regulatory reporting requirements.