A competitive advantage to help asset managers differentiate themselves.
The massive use of ESG criteria in asset management is moving forward but their implementation as an investment principle is still complex. Asset managers have to meet the increasing demand of their clients to set more transparency and ethics. Data collection and quality have hence become a major concern for asset managers. In order to do the analysis and ESG scoring of a company, the manager and the SRI analysts have to collect data from different external suppliers and compare them with their internal analysis. The lack of data standardization from these players requires to process manually the data which increase the cost and the quantity of work. It is essential to give asset managers and SRI analysts access to an interface which is going to revolutionize their way of working and will reduce the cost by leveraging on new technologies. As cost reduction is nowadays a key topic for the asset management industry, such a platform would be a real competitive advantage to meet the growing demand for sustainable assets, and at the same time managing the cost of ESG research.
How is it possible to make ESG investments easier ?
ESG criteria (environmental and social governance) usage has become compulsory for asset managers. Socially responsible investments have been multiplied by 8 between 2010 and 2016, from 3.07 trillion dollars in 2010 to 22,98 trillion dollars in 2016. This awareness of the environmental issues and the role of finance in this field respond to a new social need that comes from COP21 and supported by millennials. The move of traditional investors wealth to this new generation that is looking for transparency and sense has consequences. Indeed, low carbon impact or responsible investments have increased.
Therefore, the private sector and especially the financial sector involvement is crucial. This growing interest of asset managers for ESG may be linked to another trend : passive management rise and the necessity to find a competitive edge for active management. Passive management is growing, raising from 9% to 20% of total asset under management between 2003 and 2017. Despite this rise, passive management does not add a strong profit. In 2003 3% of the revenue was made by passive management and this only represents 6% in 2017. In the contrary, active strategies are losing market shares. Today, they only represent 33% of the managed products from 57% in 2003. It is then necessary that active asset managers offer new strategies of which active management will add value for their customer : the use of ESG criteria is a good example. ESG analysis involves ethic and conviction criteria and it is today really hard to fully automate this process. Relying on ESG criteria is hence a good strategy for asset managers to defend their margin.
A recent study showed that ESG investments can lead to more profits with a low risk in a long term perspective. Asset managers can then propose a range of ESG funds and increase their revenue provided that the investment is contained.
Today, gathering information is a heavy and expensive task due to a lack of data standardization. The data sources are diverse, incomplete and not standardize. There are two different ways to collect data, an internal or an external process. The first process requires an internal team of data analysts that will do dedicated research studies. This process is really expensive as it is only possible if a discussion is made with the company and by gathering multiple sources of unstructured data. External data given by providers are structured but they depend on the provider’s methodology and subjectivity because there is no existing regulation or standard to classify the data. The latter then requires another process to be used. As a matter of act, the aim of data providers is to generalize a method while the work of asset managers is to use ESG criteria according to their own conviction. Asset managers need in general to gather different sources of information, internal and external, which multiplies the data acquisition cost and the time to analyze it. The implementation of an efficient solution, that would automate the low added value manual is then essential. ESG analyst work would change, as data would already be classified and layered according to a chosen vision. Rather than spending his time to collect data, the analyst could then focus on his/her core business: determine the ESG profile of companies.
The design of an interface that would combine internal but also external data would make the ESG data analyzing and processing easier and allow asset managers to be more competitive. The main objective is to automate a part of the ESG analyst work that has low added value (unstructured data processing, sources comparison, document research, pre-analysis of the data, …) in order to give structured ESG data that is ready to use. The teams would be able to focus on the most rewarding task which is finalize the internal scoring and use it in the investment process. Asset managers would have access to front interfaces directly linked to the platform and then to the data. The platform would propose interfaces that would fit with the user preferences but also be connected with public data, data suppliers, increase the research relevance thanks to a classification, be notified when there is a controversy, or be connected to the internal management system of the asset managers.
As the asset managers margins are decreasing, the cost of such a platform is essential. The development as a pay-per-click serverless service will allow asset managers to pay only for the research they make and the data they consume which will then reduce the cost of data storage and hosting of ESG analysis tools. The platform will use the Natural Language Processing (NLP) as well as a machine learning system that both combined will allow to analyze unstructured data.
At Weefin we are convinced that this kind of platform is the future of ESG analysis for asset managers. Investing in a tool that will automate as much as possible the ESG investment process will act as a competitive edge while containing the increasing operational cost.
Chloé Chaufard
