Post the Biden victory and now the release of updated European Sustainable Finance Disclosure regulation, capital markets are gearing up for the new mantra that “Green is Now Good”. This is the very concept discussed at FIX EMEA 2020 back in September – ESG is no longer a fringe concept but now an integral part of the larger investment ecosystem. Major business risks, decisions and strategies stand upon ESG factors and regulators are concerned that investors are not sufficiently protected by piecemeal, ad-hoc, inconsistent information.

The industry is facing a growing “tsunami” of data, creating challenges in mapping different uncorrelated datasets to extract the relevant information, including how to:

1. Move niche investment strategies across organisations, ensuring the relevant department and team has access to the relevant data while managing proprietary data sets and current licensing models;
2. Address the new data challenges as investment policies move from Environmental to Social and Governance factors which have less hard data and are more subjective;
3. Establish the accuracy and completeness of data with which to make investment decisions, which are made more complex by the myriad of rating systems from historic providers as well as rising numbers of new entrants.

Join the FIX ESG Working Group to assess ways in which the FIX Trading Community can provide practical support to the industry in the creation of standards and protocols for ESG. Contact the Program Office to participate!

Published by: Global Trading|2nd September 2020
By Rebecca Healey, Co-Chair EMEA Regional Committee & EMEA Regulatory Subcommittee, FIX Trading Community

ESG is no longer a fringe concept. A year ago it was highlighted that more than 70% of investment firms had a commitment to incorporate ESG across all investment products – the rising pandemic along with the Black Lives Matter movement is propelling not only the E but also the S and the G now into mainstream investing; global ESG funds saw their highest inflows on record in July¹. Moving ESG from a stand-alone niche product to centre stage in the investment will create challenges but also offers opportunity for the industry. From changes in research consumption to shifts in liquidity formation, as sectors fall in or out of favour; as well as the need for increased governance to avoid rising regulatory concern over greenwashing — data to monitor, effectively risk assess benchmark and reporting ESG will be critical to the industry’s future success.

The recent campaign by Richard Curtis – “Make My Money Matter”² raises the scale of the challenge. There is £3 trillion invested in UK pension funds alone, and while end investors can choose where to invest, there is not yet the capacity in ethical funds to house all pension money. Managing the transition into sustainable finance will require a change in approach to investments through the digitisation of the investment process itself. Simply because investments are ethical doesn’t mean that the underlying companies are outperforming the norm. While ethical funds have outperformed in the downturn, this may not be based on the performance of these companies, but rather on a supply and demand boost where interest in the companies is inflating their value, which will correct itself in time.

Take the recent case of Wirecard – according to Bloomberg, 10 out of 25 analysts covering Wirecard had buy ratings on the stock as late as 18 June, the day auditors revealed that €1.9bn was missing from the firm’s balance sheet. In addition, Moral Money claims that before its collapse, Wirecard earned median-grade ESG ratings from MSCI and Sustainalytics, but not from all data providers. The myriad of conflicting ratings didn’t prevent Wirecard from being selected by some large ESG exchange traded funds which incurred losses as a result. As it stands today ESG ratings can be very subjective and there is a risk in just taking the base level rating rather than seeing it in context and conducting full due diligence – the G of ESG.

There is a legitimate argument that there can be no one-size fits all ESG strategy, however information overload will make it challenging, if not impossible, to read through the noise and hone in on what matters. Sustainable investing requires a variety of criteria to be taken into consideration ahead of an investment decision. To facilitate greater adoption of ESG in mainstream investments, new specialist research, data and analytics offerings are emerging to provide improved means of aggregating and quantifying information to identify future successful ESG and RI investments.

With Covid-19 hastening widespread adoption of ESG, the challenge for asset managers is not only the complexity of ESG as an investment strategy, but the increasing possibility of conflicting regulation. The SEC plans to lead on disclosure of ESG—“If the SEC does not take the lead, it is highly likely that other jurisdictions will impose standards in the next few years that US Issuers will be bound to follow³.” The European Commission is also implementing a new regulatory framework and taxonomy to ensure climate and environmental risks are fully managed and integrated into the financial system⁴. In APAC, regulators have produced a stewardship code and third-party conformity assessments on green funds⁵, all of which suggests future challenges for global firms planning to adhere to multiple regulators in an already evolving and complex landscape. If the issue in the past has been on the scarcity and collation of accurate data to extract value, managing this with rising investor interest, as well as, a conflicting global regulatory framework makes it critical for the industry to come together to assess what is required and how to best to deliver sufficient global standards to cover the different methodologies of ESG.

The FIX Trading Community, as an industry standards association, plans to take a key role in fostering the debate to ensure improved standardisation of ESG data and to propose industry best practices to incorporate that data. To that end, join us for the virtual debate on 18th September “ESG is No a longer a Fringe Concept” – Sustainable Investing Post COVID-19 – What is the impact on Asset Management?

Click here to view the article on line.

FIX Trading Community, the non-profit standards body, aims to make it easier for the financial industry to use environmental, social and governance data as asset managers could spend roughly $554m ($515m) for ESG data next year.

Rebecca Healey, global head of market structure & strategy at Liquidnet and co-chair of the FIX Trading Community’s EMEA regulatory subcommittee, told Markets Media that the group can provide a backbone of how new data fields are defined, the assumptions that are made and the reports that end-investors find useful so each market participant does not have to reinvent the wheel.

“The organisation provided the same service for MiFID II and saved the industry hundreds of millions of dollars,” she added. “FIX helped solve the pain points between data providers and the buy side.”

She continued that ESG as an investment strategy is a rapid success story and so is moving from niche to mainstream, requiring the use of more ESG data.

Read the full article here