Part 5.1: Use by investors of sustainable investment data, research and investment research

EC research brief

The study should analyse the use of sustainability-related products/services by investors and asset managers, per categories of providers and products, and in particular:

  • to what extent investors, benchmark administrators and asset managers get data from third parties and/or directly from companies; the study will explain the role that sustainability-related products and services currently play in the flow of sustainability information from companies to investors and to what extent and why investors, benchmark administrators and asset managers rely on sustainability information provided by third parties despite the publication of sustainability information in companies’ reports;
  • the proportion of investors, benchmark administrators and asset managers which have developed in-house sustainability-related analysis and tools, compared to those that enquire for external analysis from sustainability-related products and service ;
  • factors that drive the use of sustainability-related products and services provided by a third party;
  • how a provider of sustainability-related products and services is selected;
  • to which extent investors and asset managers integrate those products/services in their investment decision-making and due diligence processes;
  • for other products/services than those referred to in section IV, the perceived degree of transparency of the methodology of the providers;
  • for other products/services than those referred to in section IV, the problems/bias identified by investors, benchmark administrators and asset managers on sustainability products/services;
  • whether the sustainability products/services correspond to the needs of investors, benchmark administrators and asset managers;
  • if investors, benchmark administrators and asset managers value the high variety of products/services offered in the market or if they prefer to see a certain degree of standardisation and

To that effect, the contractor should propose a methodology that will ensure the involvement of a representative number of:

  • asset managers (pursuing passive and active investment strategies),
  • benchmark administrators and
  • institutional investors.

The contractor should also take into account the differences between asset managers pursuing passive investment strategies and asset managers pursuing active investment strategies to answer the above- mentioned questions.

The contractor should also interview relevant NGOs on the perceived quality of sustainability-related products and services, and the bias/problems that they identified.

To what extent do ASSET MANAGERS get data from sustainable investment data, ratings and research providers?  To what extent do they get information directly from companies? Why? How do asset managers integrate sustainable investment data, ratings and research into their investment decision-making processes?  Do sustainable investment data, ratings and research providers meet the needs of ASSET MANAGERS?  How could they better meet these needs?

  • EC interest: "The study should … explain the role that sustainability-related products and services currently play in the flow of sustainability information from companies to investors and … the extent to which and why investors, benchmark administrators and asset managers rely on sustainability information provided by third parties despite the publication of sustainability information in companies’ reports … [to include analysis of] the extent to which … asset managers get data from third parties and/or directly from companies”. "The study should analyse … to which extent … asset managers integrate those products/services in their investment decision-making … processes, … [whether] the sustainability products/services correspond to the needs of asset managers … [and whether they] … value the high variety of products/services offered in the market or if they prefer to see a certain degree of standardisation and ”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask asset managers:

  • what parts of the sustainability investment process they undertake in-house and what they outsource
  • what types of external sustainability providers they use and for what purpose
  • what value they derive from each type of researrch and whether they are happy with the variety of providers and products on offer.

What we (think we) already know => Context

Almost all asset managers now receive some of their sustainable investment information via third party sustainable investment data, ratings and research providers.  At the same time, an increasing number of asset managers have in-house research analysts.

Typically, the type of research products that asset managers purchase and the work that they do in-house depends, to a large degree, on the nature of the SRI strategies that they want to offer to their clients.  (See table below)  Arguably, the blend that they achieve between externally-sourced and in-house work (combined with product suitability and financial performance) is one of the key differentiators within the sustainable investment market.

From the IRRI'19 Survey, we know that asset managers buy-in 1.8 ‘Waterfront SRI/ESG subscriptions, 0.9 proxy voting services, 3.5 broker research products and 2.5 specialist SRI/ESG sources.

In terms of the nature of information that they receive from SIDRIR providers, they tend to receive basic data-driven information from SIDRIR providers and look to sell-side providers, to independent specialists or to their own in-house teams for more complex investment-thesis orientated research.

 

Sustainable investment data

Screening services

ESG ratings

Issue-focused ratings

Supportive sustainable investment research

Contextualising sustainable investment research

Integrated sustainable investment research

Engagement research

Controversy alerts

[a] ethical screening

 

X

             

[b] environmentally-based screened & tilted strategies (including climate change-based screens & tilts)

X

X

             

[c] socially-based screening & weighting

X

X

             

[d] best-in-class

   

X

           

[e] thematic investment

X

X

     

X

     

[f] fundamental (bottom-up) integration

         

X

X

   

[g] quants (top-down based) integration

X

               

[h] active engagement

     

X

     

X

X

[i] reporting and impact analysis

X

               

To what extent do BENCHMARK ADMINISTRATORS get data from sustainable investment data, ratings and research providers?  To what extent to they get information directly from companies? Why?  How do BENCHMARK ADMINISTRATORS integrate sustainable investment data, ratings and research into their investment decision-making processes? Do sustainable investment data, ratings and research providers meet the needs of BENCHMARK ADMINISTRATORS?  How could they better meet these needs?

  • EC interest: "The study should analyse … to what extent … benchmark administrators … get data from third parties and/or directly from companies”. "The study should analyse … to which extent … benchmark administrators integrate those products/services in their investment decision-making and due diligence processes, … [whether] the sustainability products/services correspond to the needs of benchmark administrators … [and whether they] … value the high variety of products/services offered in the market or if they prefer to see a certain degree of standardisation and ”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask benchmark providers:

  • what parts of the sustainability investment process they do in-house or and what parts they outsource
  • where they source their data from
  • whether they are happy with the variety of providers and products on offer.

What we (think we) already know => Context

Benchmark administrators are divided between:

  • those that use in-house teams to gather data and produce the ratings that underpin benchmarks (e.g. FTSE, MSCI ESG) and
  • those that outsource such collection to third parties (e.g. Solactive outsources to ISS, Stoxx outsources to Sustainalytics) etc.

Importantly, the nature and extent of research required depends on the type of products that the benchmark administrator seeks to offer in respect of ESG.  For example, a simple score might be sufficient for an ESG-tilted index.  However, more granular data will be required for any analytics products that are offered alongside to asset owners alongside any benchmarkable index.  We will explore, with interviews, whether or not the benchmark administrators feel that they are being offered the right products to enable them to deliver.

At face value, the process by which benchmark administrators apply sustainability information to the construction of benchmarks is relatively straightforward.  However, three things have increased the complexity of this in recent years:

  • the arrival of new sources of data - most notably web-crawled data that has the ability to reduce the costs of data collection considerably. As cost reduction is at the heart of the passive investment process, this is probably more attractive to passive investors (and the benchmarks that they use) than to active investors (who are more likely to value the quality of information)
  • the weighting process - which can throw up apparent anomalies (such as high weightings for oil companies within low-carbon funds)
  • the emergence of 'tilting' whereby the objective is to adjust weightings rather than to take any to zero

How do INSTITUTIONAL INVESTORS integrate sustainable investment data, ratings and research into their investment decision-making processes? Do sustainable investment data, ratings and research providers meet the needs of INSTITUTIONAL INVESTORS? How could they better meet these needs?

  • EC interest: "The study should analyse … to which extent … institutional investors integrate those products/services in their investment decision-making … [whether] the sustainability products/services correspond to the needs of institutional investors … [and whether they] … value the high variety of products/services offered in the market or if they prefer to see a certain degree of standardisation and ”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We would like to know from asset owners which sustainable research services they find most useful and whether they are happy with the variety of providers and products available.

What we (think we) already know => Context

Institutional investors’ (asset owners’) activities in sustainable investment tend to focus on:

  • Asset allocation
  • Manager selection
  • Manager monitoring
  • Reporting & communications
  • Industry & public policy activity

According their exposure to single-stocks and to the sustainability issues that affect these differs significantly from asset managers.  As a result, their use for sustainable investment data, ratings and research differs significantly.  Simply expressed, they tend to need portfolio-wide analytics rather than single stock research or ratings.

For their core activities, they require the sustainable investment services set out in the table below

Asset owner activity

Research services required

Asset allocation

Thematic and contextual sustainable investment research to understand macro sustainability trends

Manager selection

N/A

Manager monitoring

Data (and possibly ratings) for analytics of portfolio exposures

Reporting & communication

Data for analytics of portfolio exposure.  Possibly thematic and other sustainable investment research for context and case studies

Industry & public policy activity

Controversy alerts, engagement support research and possibly data to support these

There are, however, a few exceptions to these core activities:

  • Asset management: Some ‘asset owners’ also manage their own assets. They therefore interact with the market in the same way as asset managers and therefore have similar research needs. For the purposes of this study, we will consider such asset owners to be asset managers – as this corresponds to the function that they fulfil in the market.
  • Engagement: Some asset owners (notably Australian, US, some of the larger European ones – also the European ones with particularly strong ethical motivations – such as churches, charities and foundations - engage directly with companies). For this they need access to engagement-related research and controversy alerts.

The role of sustainable investment data providers in portfolio analytics

The question of how institutional investors use sustainable investment data touches on a developing area of debate within the sustainable investment value chain – specifically the way that such data is used by ‘asset owners’ in portfolio analytics that measure the sustainability exposure of portfolios run by asset managers.

Asset managers are increasingly voicing concern that asset owners are measuring their performance based on information supplied by sustainable investment data providers that:

  • Does not correspond to the sustainability features targeted by the asset managers (particularly where research providers focus on the sustainability processes of companies while the asset managers have invested in companies whose products deliver sustainable development)
  • Use data that is inaccurate or incomplete or weightings that are not effectively targeted at sustainability to make these assessments
  • That the use of a single type of exposure analysis in portfolio analytics causes prejudice against investment strategies that may have more sustainable outcomes but take different approaches
  • There is undue self-interest in a business model that involves data providers selling analytics services to asset owners for use assessing managers that are then effectively forced to buy services that they do not want in order to justify their portfolios against scores that they do not believe in

We note that these considerations extend beyond their use by institutional asset owners and include their application to portfolio analytics offered to retail investors by firms such as Morningstar.

That said, the development of impact assessment is at an early stage and numerous different approaches are being tested.  We will explore further the views of providers and users around impact analytics and the data that is used for these.

What proportion of ASSET MANAGERS have developed in-house sustainability-related capacity? Vs What proportion use external support? Vs what proportion use both?

  • EC interest: “The study should analyse … the proportion of asset managers … which have developed in-house sustainability-related analysis and tools, compared to those that enquire for external analysis from sustainability-related products and service”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask asset managers about their in-house capabilities in sustainable research, what the most valuable forms of research to them are, how they divide their research budgets and what sources of research and information they regard most highly.

What we (think we) already know => Context

As discussed above, the vast majority of asset managers use third party sustainable investment data, ratings and research providers to some extent.  For some, this is their sole source of sustainability information.  For others, it is one of many sources.

We know from IRRI’19 that, on average, asset managers employ 2.3 sustainability portfolio managers, 4.2 sustainable investment analysts and 1.1 sustainability specialists within their communications / client relations team.

What proportion of BENCHMARK ADMINISTRATORS have developed in-house sustainability-related capacity? Vs What proportion use external support? Vs what proportion use both?

  • EC interest: “The study should analyse … the proportion of benchmark administrators … which have developed in-house sustainability-related analysis and tools, compared to those that enquire for external analysis from sustainability-related products and service”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask benchmark providers about their in-house capabilities in sustainable research and how they source their sustainability data.

What we (think we) already know => Context

Benchmark administrators are organisations that provide (regulated) administration services for specific benchmarks  (Listed here).

“The FCA defines these services as:

  • administering the arrangements for determining a specified benchmark, or
  • collecting, analysing or processing information or expressions of opinion for the purpose of determining a specified benchmark, or
  • determining a specified benchmark through the application of a formula or other method of calculation to the information or expressions of opinion provided for that purpose.”

Benchmarks are provided by:

  • Independent benchmarking specialists - such as FTSE Russell and MSCI
  • Stock exchanges
  • Investment banks

They are used:

  • as a baseline against which the performance of a company, fund or asset manager can be compared.
  • as a dataset that can be used for the construction of stockmarket indices and thence passive funds and ETS

Benchmark administrators also sell underlying data to enable asset owners and asset managers to measure their exposure relative to and investment performance against defined benchmarks.

Within sustainable investment, benchmark administrators offer:

  • Tilted indices that use sustainability datasets (either broad ones that incorporate a diversity of ESG issues or narrow ones focused on (for example) climate change) – either for the purposes of performance measurement or for passive fund / ETF management.
  • Datasets for asset owners to measure exposure

To do this, benchmark administrators typically need to combine:

  • A financial / investment dataset (such as the market capitalization of stocks in an index) – which they typically develop themselves or draw from the same sources as they draw their ‘mainstream’ financial datasets
  • A sustainability dataset which they either:
  • gather directly from companies themselves or
  • sourced from third-party sustainability data providers

We will explore further with our research, which of the major index providers chooses which approach.

How do investors select research providers? (criteria) How do investors select research providers? (frequency and process)

  • EC interest: "The study should analyse … how a provider of sustainability-related products and services is selected … and … the factors that drive the use of sustainability-related products and services provided by a third party;”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We would like to know from asset managers:

  • what process they use to choose an ESG data supplier
  • which research providers they use
  • what they find most valuable about different research providers
  • what they would like to see more of from research providers.

What we (think we) already know => Context

The discipline with which asset managers select research providers varies widely:

  • Some have well-organised processes that start from a clear definition of their client expectations, their own needs and budget and progress in an organised fashion to identify which of these needs can be met via internal capabilities and which need to be bought in from outside
  • Others know that they need to 'do ESG' and buy a full suite of services from the provider with best reputation at acceptable price.
  • ... and everything on the spectrum in between

We know - on an anecdotal basis - how some asset managers select their research providers and Rate the Raters has provided historic criteria which asset managers have said is material to their selection decisions. We are interested to see if these criteria have changed in importance over time and whether they are still relevant today.

What problems / biases do institutional investors, benchmark administrators and asset managers perceive with sustainable investment data, ratings and research?

  • EC interest: "The study should analyse … for other products/services than those referred to in section IV, the problems/bias identified by investors, benchmark administrators and asset managers on sustainability products/services;”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask all industry participants:

  • How could the products and services provided by sustainable investment data, ratings and investment research providers better meet your needs?
  • What problems or biases do you perceive in the provision of sustainable investment data, ratings and research? How might these be fixed?

What we (think we) already know => Context

Asset managers are well aware of most of the problems and biases within service provision by sustainable investment data, ratings and research providers.

Nonetheless, we will test in interviews whether there are other perceptions and opinions that we have not yet identified.  The fact that the problems and biases persist (even though the market is largely functioning and competitive) suggests that they do not rate quality highly-enough to pay more for it (this will be tested as above).  This leads to the question, why does data quality and lack of bias have such low implied value?

What problems / biases do NGOs perceive in the quality of sustainable investment data, ratings and research?

  • EC interest: “The contractor should also interview relevant NGOs on the perceived quality of sustainability-related products and services, and the bias/problems that they identified.”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We ask NGOs how sustainable investment research helps achieve the change they would like to bring about in the world and how it could be improved.

What we (think we) already know => Context

Over the past 20 years, sustainability NGOs and campaigning organisations have been broadly supportive of the development of sustainable investment.  However, the press has recently reported how some NGOs have become critical of the objectives sought and results achieved (or not achieved) by sustainable investors.  Examples include:

We will explore the extent to which NGOs believe that this is due to:

  • insufficient underlying demand for sustainable investment strategies
  • insufficient ambition levels by asset owners / managers
  • adoption of sustainable investment strategies that are not robust enough (e.g. a ‘best in class’ strategy rather than exclusion)
  • failings in the research processes that support sustainable investment strategies.

We do, of course, recognize that NGO campaigning pressure is equally influenced by the vulnerability of the target (i.e. major brands) as it is by the nature of the underlying concern.