The Luxembourg fund industry was given its ESG marching orders last week by CSSF CEO Claude Marx at the Alfi European Asset Management conference. “I am sometimes irritated by those who over inflate small issues or imperfections in this area,” he said. “Focus on identifying the right data sources and prepare your systems to make good use of them.” Some asset managers have made progress, and they described their efforts in a panel at the conference.
“The challenge is considerable, but we got there,” said Eric Borremans, Head of ESG at Pictet Asset Management. “We created our own propriety metrics that we feel comfortable with, and we did this by sourcing data from 10 different providers, focusing on 25 unique data sets,” he said. “To do that you have to treat ESG data as professionally as financial data, that is by being very rigorous,” he said.
Off-the-shelf insufficient
Most in the industry realised quite quickly that off-the-shelf ESG ratings are insufficiently robust to rely on completely. “Data providers don’t have a magic wand,” said Anne Schoemaker, a director with the analysts Sustainalytics.
“We have estimation models, and we provide proxies where we see that is meaningful. This is better than having nothing at all, and gives a sense of direction.” Nikkie Pelzer, Impact Manager of Triodos Investment Management agreed. “Rely on proxy data for conducting gap analysis, but don’t use it as a driver for investment decision making,” she said.
There is no alternative than to put in the hard work of assembling the data by hand. “The ESG data gap was obvious as you can’t use third-party databases, you have to actually investigate those projects directly,” she said Isobel Edwards, a Green Bond Analyst at NN Investment Partner.
This means making calls and sending emails. This raw data on everything from carbon emissions through to gender board diversity is analysed and aligned with the taxonomy. There will still be gaps in the data, and here judicious use of proxies and estimations can help.
Treat data with respect
“The general rule is that if you are not sure, do not assume. Don’t over inflate,” said Edwards. She noted that some funds had made announcements of full, 100 percent alignment with the taxonomy, which is probably near-impossible to achieve. The asset manager is probably running the risk of accusations of greenwashing.
“But these are brand new metrics, and it’s a brand new way of doing things, so it will take time for the industry to adapt,” she said.
A more realistic target is that set by Pictet for one of their funds. “We had a weighted average figure of nearly 30 percent alignment with the taxonomy,” said Borremans.
On the back of this work he said they applied successfully to the Luxembourg state to receive reduced subscription tax. The standard “taxe d’abonnement” is 0.05 percent of net assets under management, but when at least 5 percent of its total net assets are aligned with the taxonomy this drops to 0.04 percent, or to 0.03 percent, 0.02 percent, and 0.01 percent, for 20 percent, 35 percent, and 50 percent respectively.
Classification challenges
As well as the grunt work of calling and classifying, Borremans spoke about some of the complications of making this data meaningful.
“In our Clean Energy Fund, we have exposure to battery manufacturers, but then you have to ask whether these are for stationary use or for transportation, and whether there is a system in place for recycling their products,” he said.
“You have to use company structures to navigate and maximise the coverage of the data that you use,” he added. “You need to take a view of how to aggregate or transfer data from one legal entity within the same group to other legal entities, for example.”
He noted that the challenge is considerable for European firms, but is greater still for business in other parts of the world which have little or no awareness of the EU ESG directives. The panel noted that it will help once the Corporate Sustainability Reporting Directive comes into force next year. Yet while this will ease the process for large-cap European companies, small and mid-caps will be out of scope, as of course will non-EU firms
However the broad message was that this is a manageable task.
A manageable challenge
“In the main it actually becomes quite clear over time after you find your way around,” said Pelzer. Yes there needs to be a systematic process, of screening for positive impact, minimising negative impact, defining areas that are not applicable, and managing the risk. “But I think we just have to accept that there is some degree of subjectivity to this,” said Edwards.
“You just have to be transparent about the methodology and data sources used.”
This message was supported earlier in the day by Claude Marx.
“The regulator will not expect from you to do the impossible. What I can give you as advice is to take what is out there in terms of regulation and start to prepare,” he said. If good faith efforts are made to comply “then I think you are going to be on the safe side as far as greenwashing accusations are concerned,” he said.
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