Technology, transparency and transition
Environmental Finance: Investment managers are facing a growing regulatory burden, with the need to comply with the SFDR, the EU Taxonomy regulation, etc. How can they best address the data challenges involved?
Patricia Torres: Investment managers need to have strong data, analytics and integration, and they need to be very clear about their sustainability goals. Are they looking to address ESG risk, or pursue impact? Can they demonstrate alignment with these goals? To do that they need to do their homework, understand the data they are ingesting, and ensure it is fit for purpose.
Investment managers also need to be on top of evolving global regulatory requirements and recognise that each one will require specific datasets and information so they can comply and market their funds appropriately. It’s something we’re very focused on at Bloomberg, structuring datasets to allow compliance with ESG regulations as they evolve, like the EU Taxonomy requirements, for example.
We also ensure we can provide estimates to fill gaps when there is not sufficient company reported data, whether it’s carbon emissions data or EU Taxonomy eligibility data. For example, of the 4,360 companies we’ve reviewed, only 315 have reported their EU Taxonomy eligibility data as of June 2022. It is important for investors that their data vendor can address gaps such as these.
Brad Foster: In terms of regulatory scrutiny, this is nothing new for us. We have more than 60 regulatory solutions for both buy- and sell-side clients. The same issues always apply: customers want to understand the source of the data, they want full transparency, consistency and alignment. They will need to be able to link ESG data to other datasets, whether it is for regulatory or risk use-cases. This a well-trodden road for us.
EF: For investors, the ultimate value of ESG data is in its use informing investment decisions. How are clients integrating ESG data in their investment processes?
PT: What we’re hearing from our clients is that effective ESG data integration must be done at every level of an organisation, so it requires a new target operating model spanning areas like company vision, structure, processes and data and technology. To help address that, we provide solutions across five pillars: research and ideas generation, which include our indices and BI and BNEF research arms; ESG insights and integration, including our proprietary and third-party data and scores; portfolio and risk management; compliance and risk oversight; and technology and data management solutions.
BF: Another big question our clients are asking themselves is, how is the transition to net zero going to impact company fundamentals and their underlying business models? For example, how will ESG factors affect the ability of a company to generate revenue and, therefore, how will this impact credit spreads and buy-side liquidity and how companies fund themselves if funds are precluded from investing in companies that don’t meet certain ESG criteria?
EF: There is a lot of confusion as to exactly what ESG scores measure. How should users understand them?
PT: The market is opaque. People often don’t know which inputs are going into an ESG scoring model, and even what the purpose is. Are they intended to measure ESG risk and opportunity, or do they seek to measure impact? There are questions as to whether aggregated ESG scores are still useful, given that they represent a mixed bag of different metrics, and it is rarely clear which inputs, with which weights, were used to compute each element.
The most important thing the market needs is full transparency around where the data comes from, and on how scores are aggregated and weighted. Once users understand what a score measures, they can determine how to use it to support their strategy. This is why Bloomberg scores are data-driven and fully transparent, enabling users to examine the methodology and underlying company-reported data. If you bring transparency, then you bring trust.
EF: Banks are under growing scrutiny from regulators and their own investors regarding climate risk. What options do they have regarding climate risk data?
PT: Banks will be absolutely critical to the transition, and they recognise that climate risk is financial risk. The data needs to decipher this are enormous. Banks need to be able to measure their portfolio’s emissions and the physical and transition risks down to the asset level. They need to understand companies’ transition plans, their energy intensity, their water intensity, the location of specific assets, and their supply chain exposures. They then need to model at least three climate scenarios out to 2100 and understand how their investments will perform under those scenarios.
Regulators are asking banks to run this sort of climate stress-testing, and we’re working with many banks on such tests and helping with some of the required disclosures, such as for the European Banking Association Pillar 3 ESG reporting.
These exercises are only as good as the data feeding the models. This is an area that Michael Bloomberg is very interested in: he recently announced with French President Emmanuel Macron, the UN and other partners an open-data platform to ensure the market has access to the high-quality consistent data that it needs to properly price climate risk. This will be very important. We don’t have any time to lose.
For more information, see www.bloomberg.com/professional/solution/sustainable-finance