Putting an end to greenwashing accusations – innovative ESG data solutions in the fund industry

For several months now, public debate about greenwashing has been ongoing – especially the accusations against large banks and asset managers who wrongly describe themselves or their products as sustainable. Furthermore, the downgrading of numerous EU-domiciled investment funds with ESG labels (Article 8 or 9 according to SFDR) towards the end of 2022 puts sustainable investments in a bad light, leading to increasing uncertainty among investors as to whether and how they should react.

The lack of transparency of financial products is a core problem that the industry has been struggling with for years, as large amounts of data are needed to assess the sustainability of products or the underlying investments. By offering innovative software solutions, providers such as FE fundinfo ensure that ESG data is analyzed and disclosed efficiently and to a high standard, thus giving investors certainty.

We spoke to Dr. Matthias Breier, Head of ESG Product at FE fundinfo, about sustainability and transparent product solutions in the context of regulatory requirements in the fund industry.

About FE fundinfo

Dr. Matthias Breier,Head of ESG Product at FE fundinfo
Dr. Matthias Breier is Head of ESG Product at FE fundinfo, a leading provider of data and technology for investment funds.

Hello Dr. Breier, you have been Head of ESG Product at FE fundinfo since last year. What role does FE fundinfo play in the economic space between fund providers, fund distributors, financial advisors and investors, and what role do ESG products play in this context?

FE fundinfo is a leading provider of investment fund data and technology worldwide. We provide transparency and enable asset managers, fund managers, fund distributors and advisors to identify business value and tap potential. Our data and information management tools enable our clients to meet regulatory and reporting requirements throughout the life cycle of a fund. The quality of our data and the expertise of our advisors affect investment decisions that affect millions of people around the world.

From an ESG perspective, we offer our clients a range of products and services. We support fund managers in their ESG reporting, ESG data management and data provision – for example via the European ESG Template (EET), FinDatEx’s industry-standard SFDR template. We also provide financial advisors with the fund-level data available to us via our FE Analytics research platform. Here they can search and compare more than 300,000 portfolios and instruments and make a simple pre-selection of funds based on suitability criteria.

Sustainability and regulatory requirements in the fund industry

Since the publication of the EU Taxonomy and the Disclosure Regulation, net inflows into fund products that are considered sustainable have been steadily increasing – as of September 30, 2022, about 50% of the investment volume in EU-domiciled funds is invested in a sustainable manner, i.e. in funds that comply with Article 8 or 9 of the SFDR.[1] Fund providers actively participate in launching innovative products, but seem to have problems with the implementation of regulatory requirements, especially in the area of ESG data disclosure. What is your opinion on current developments regarding sustainability in the fund industry and the interpretation of regulatory requirements?

In general, current developments in the area of sustainability can only be regarded as very positive. We see that there is strong momentum to create transparency and appropriate regulations for sustainability solutions in the fund industry.

On the one hand, it is clear that some of these regulations have turned out to be more complicated than many market participants had hoped. On the other hand, sustainability is a very sensitive topic because there are different ways to develop a sustainable investment solution and not just one standard method to assess sustainability. The European Union’s SFDR reflects this complexity quite well.

As it highlights the huge variety of use cases, it has become a major challenge for the industry, which needs to be mastered. And we also see that there are many unanswered questions and uncertainties in the industry that have ultimately led to a number of funds being downgraded from Article 9 to 8 recently.

However, we see the reclassification of the funds as a positive step. This is because this process demonstrates that the industry is gaining a better understanding of the attributes and sustainability goals required for Article 9 status.

In general, we regard it as positive that there will be more regulation and transparency guidelines so that fund managers know what to report. And this will continue to create clear standards for sustainable investments in the future.

The problems in implementing regulatory requirements, and in particular the disclosure of ESG data, are often due to the regulatory regime itself. Critical voices accuse the EU Commission that various requirements such as MiFID and the Disclosure Regulation are not aligned with each other and are far too specific, so that, on the one hand, an enormous amount of data and calculation is required and, on the other hand, no reliable opinion can be made about the sustainability of a fund. If you could give the EU Commission two tips on how to improve regulation with regards to ESG, what would they be?

First of all, I strongly believe that we need leaner and less complex reporting. I am not talking about the regulation itself, but the actual report, the final result. Even for experts in the field it is difficult to fully understand all of the required data points in SFDR reports. And sustainability is already a complicated issue. How then are investors to derive any benefit from these reports?

The European Union has tried to find a framework to ensure that every form of investment fits within the SFDR report. But, if we are honest, these documents were not originally intended just for ESG experts. And now we have regulations that force the industry to produce reports with up to eight pages of body text.

There won’t be any retail customers and not many institutional customers that are actually well versed in what we’re reporting there. So my suggestion for improvement in the future would be to reduce the complexity and create a report that provides a simple overview. And this initial report can and should be usable and understandable in the market. Switzerland is taking a very good approach in that regard with the Swiss Climate Scores.

A second recommendation would be greater consistency and clarity in scheduling. Due to the time sequence of SFDR reporting, funds must report on data that companies are not yet required to publish. From the European Union’s perspective, it would have been much easier to define what companies should measure and make publicly available, rather than forcing the fund industry to report on key data that is not even available yet.

I think the industry could deliver much better and more effective ESG reporting this way.

ESG data quality in the fund industry

The lack of quality of ESG data, for example in pre-contractual information and disclosures on websites, is often mentioned as a key point of criticism by investors. This is due to the fact that detailed data on long-term impacts on sustainability factors (the so-called Principal Adverse Impacts, PAIs) or EU taxonomy ratios are sometimes patchy or not available at all and are often difficult to analyze and interpret. How strongly do you consider this criticism to be justified and what measures do you take as a software provider to improve data quality as well as availability in the long term?

The issues regarding the quality of ESG data reflect the point I made earlier: we should first ask companies to publish certain core data, and then require the fund industry to report on that core data.

However, it’s about more than data. Not having access to the right data at the right quality can be a convenient excuse. Even if the data and estimates for the free emissions range are not one hundred percent correct, they are very close to a company’s actual emissions. We can demand 100% availability and accuracy of data in the industry, but we still don’t have enough experts to understand and explain it.

There is a lot of good and meaningful data on the market. And it is much better to rely on estimates than to do without them.

Product solutions with a social or governance focus

Investment solutions with an ecological focus dominate the sustainable product segment and are increasingly regarded as mainstream. However, product solutions with a social or governance focus can contribute to differentiation from competitors in the long term and thus be claimed as a USP, but are rarely seen in the market. How advanced do you regard the development of products beyond ecological characteristics, and what specific challenges arise in the other two dimensions in terms of data quality and interpretability of KPIs?

Anything beyond environmental features remains a challenge. We also see this with the regulatory authority itself. It has created a taxonomy for ecological alignment, but even this does not provide a complete catalog of definitions. And we are still waiting for the social taxonomy. It has already been postponed several times. This is understandable, because the social aspects are even more complicated to evaluate, especially from a quantitative point of view.

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The Taskforce on Nature-related Financial Disclosures (TNFD), which will soon set information requirements, focuses very much on environmental characteristics. But especially in the social sphere, it is difficult to reach a general understanding, which is due to cultural differences.

Social metrics are primarily about transparency in the supply chain. Fund managers need ESG data on both a company’s direct and indirect suppliers – for example, for electric vehicles, to see where these companies source lithium and cobalt for their batteries, as well as the myriad components and materials needed to build them.

The outlines of reporting are also taking shape at the national level. The German Supply Chain Due Diligence Act, which came into force on January 1, 2023, is designed to oblige companies that source products and services from developing and emerging countries to comply with human rights and environmental standards. Much of the evidence of compliance with these standards will come in the form of industry certifications and audits.

Fund Information Hub to centralize fund information

During the life cycle of a fund, huge amounts of data and documents are generated, often used in more than one place. For example, PAIs are not only published as part of the annual PAI statement at company level, but also as part of funds’ annual reports and in reporting such as the EET. To make this complex data and document management as well as reporting processes more efficient, FE fundinfo has created the Fund Information Hub to centralize fund information. What added value does such a “golden source” bring?

There should not be several core data for one and the same purpose on the market, but rather one official data pool that represents the “golden source”, so to speak. And this is where our Fund Information Hub comes in. It includes the tools and functionality needed to understand the data and ensure that everyone in the market is using this “golden source” – in every detail.

It’s all about data management and making sure that all stakeholders have access to the relevant data at the right time. This is also highly interesting from an ESG perspective. When we talk about ESG in the market today, we see fund managers, for example, using MSCI both in their investment process to decide what to invest in and in their reporting. However, other providers – such as Sustainalytics, ISS, etc. – could also calculate an ESG score for a fund based on information about total portfolio holdings and criticize providers for assigning low scores.

But this criticism may not be justified. The low score could simply be due to a lack of correlation between data providers. That is why we need this “golden source” of truth. A provider must be able to say: “This is the actual core data set that I measure for this fund.” That’s the only way to ensure that we are truly evaluating these funds based on the data used in the investment process.

Transparently offering illiquid asset classes in the area of ESG

Data quality and availability are often discussed in the context of liquid asset classes. Here, numerous data providers enable a standardized evaluation of ESG data from large companies and their use for corresponding disclosures regarding equity products. For illiquid asset classes such as real estate or infrastructure, the challenge appears to be much greater, as each product manufacturer must collect and analyze their own data. How can software solutions provide support for such illiquid asset classes and investments? What needs to happen beyond these solutions so that market participants will be better positioned in the future to offer such asset classes transparently in the area of ESG?

Yes, we have to admit that illiquid assets are challenging from an ESG perspective. There are many innovative providers in this area with useful solutions for measuring and tracking illiquid assets, storing the data and ensuring it is used effectively.

At FE fundinfo, we support the presentation and preparation of reports for illiquid assets, too. It is still very difficult to calculate the balance of a real estate or infrastructure portfolio. This will become easier in the future but will most likely always remain a kind of niche application because it requires a combination of customized solutions. Product solutions cannot necessarily help in this area.

Nevertheless, it is a positive development that the asset management industry is beginning to address these issues.

We support our clients in this regard too and offer them solutions for creating reports and making their data available. We also ensure that this data gets to the right people. And there are also companies that help these clients collect the data, calculate it, and bring it down to fund level.

Future of the fund industry

With regards to important events of recent years for the sustainability ratings of products, such as the classification of nuclear power and gas as sustainable and the increasing acceptance regarding defensive armaments since the start of the Ukraine war, the question arises as to what extent the fund industry is not only innovative but also flexibly positioned to take into account a constantly changing definition of sustainability in data and processes. What opportunities or challenges do you see in this regard in the coming years? What expectations do you have of the industry and also of the regulator?

Some of these considerations are very much culturally determined. We know from a cultural point of view why the French aim for nuclear energy and the Germans for gas as green in the taxonomy. The only way for us to deal with this difference of view is to overcome the cultural and political barrier. But that is unlikely to happen anytime soon.

Consequently, any core data set or issue that is politically and culturally determined, as in energy or defense, will always have a strong influence on the development of regulations.

At FE fundinfo, we talk about exclusion criteria. Defense and energy are classic exclusion criteria, but we know that these are culturally determined. In the United Kingdom, there are different exclusion criteria than in Central Europe, Germany or Austria. We also see differences when comparing a more religious and a less religious country. But these exclusions should not distract us too much from the real goal: the pursuit of a more sustainable future.

If everything in a portfolio is geared towards a sustainable future and has a strong environmental or social impact, maybe we shouldn’t worry about the one investment that still goes to nuclear power. It’s only one investment.

In a perfect world, that wouldn’t happen. But we must also acknowledge the complexity of the world in which we live. And I think we should accept that not everything can be perfect. We don’t always have to see a blank zero when we talk about exclusion criteria. We need to comprehend why someone may still believe that investing in nuclear energy or gas will help them achieve their overall investment goal.

[1] Morningstar Research, Q3 2022 review.

About Dr. Matthias Breier

In his role, Mr. Breier defines the product strategy of ESG solutions and its implementation for asset managers and advisory clients. Prior to joining FE fundinfo, he worked as an ESG product manager at CSSP, a fund and portfolio ESG reporting company based in Liechtenstein. Breier holds a PhD in Business Model Innovation from the University of Lappeenranta, Finland.

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Anna Lena Giersbach / Autorin BankingHub

Anna Lena Giersbach

Senior Consultant Office Frankfurt
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Fränk Hamélius

Senior Consultant Office Zurich

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