ESG Data Integration by Asset Managers : Targeting Alpha, Fiduciary Duty & Portfolio Risk Analysis

Executive Summary


The overall value of assets under management (AUM) at funds leveraging environmental, social and governance (ESG) data has increased significantly over the past four years, from US$22.9 trillion in 2016 to over US$40 trillion in 2020. With ESG data integration becoming prevalent at asset managers, this growth trajectory is unlikely to slow any time soon.

ESG indices have outperformed their parent indices, even during the COVID-19-induced economic downturn. While several reasons explain this—from asset allocation to a more limited number of constituents—the outperformance of ESG indices underscores the ability of fund managers to use ESG factors to generate alpha.

Even so, the vast majority of asset managers that leverage ESG data only do so within their risk management practices to evaluate the potential ESG risk of their holdings. The usage of ESG data as part of the fund’s investment strategy tends to still only be seen at funds that have a binding ESG focus and are labelled as ESG funds.

The integration of raw ESG data into investment strategies creates additional alpha-generation opportunities for asset managers. For long-term investment strategies, ESG data contain valuable insights, such as employee-turnover ratio, alignment with +2°C climate change objective or board independence. On a more short-term basis, delving into raw ESG data regarding a company helps identify future ESG rating changes, which directly impact stock prices. Obviously, there is also an opportunity for active managers to leverage the asymmetry of information to conduct transactions based on expected ESG controversies.

The asset management industry is gearing up for a massive adoption of ESG data within investment strategies by going on a recruitment spree to beef up their ESG teams.  At the top 30 global asset managers, ESG teams have grown on average by close to 230% between 2017 and 2020.

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