Institutional investors are demanding higher quality and greater transparency of environmental, social and governance (ESG) data to help make better investing decisions. In particular, they are concerned about how climate change and a shift to a low-carbon economy could impact the risk and return outcomes of investment portfolios.

Nearly half of asset owners are asking asset managers to report on the greenhouse gas emissions (GHG) and carbon intensity of a portfolio (46%) and security-level exposure to climate risk (46%), a new survey by research and consulting firm Cerulli Associates finds.

Close to one-third of asset managers also require or plan to require data in the next 24 months on portfolio-level exposure to climate risk and scenario-testing metrics for climate change.

While many asset owners ask their individual asset managers to measure and report on their portfolios’ carbon footprints, most institutions polled have not established targets for their overall investment portfolio as they seek to reduce its full carbon footprint. To bring it to the next level, asset owners need to commit to these activities in their investment policies, according to the latest edition of Cerulli Edge.

“As more asset managers consider material ESG information as part of their investment framework, asset owners want to know how asset managers use ESG data to better understand what a company does and how it does it,” says Cerulli director Michele Giuditta. “This includes evaluating the asset manager’s ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making.”

Thematic metrics

Nearly one-third (32%) of asset owners require and more than one-third (38%) plan to require their asset managers to report on thematic metrics, displaying how their investments make measurable social and environmental impact.

However, identifying the exact impact of investments is difficult. More than one-third (39%) of asset managers surveyed cite that limited/selective disclosure of ESG data from companies as a major challenge. Insufficient data from third-party providers and subjectivity of ESG factors in investment analysis were also rated as top challenges.

While many frameworks for measurement exist, there is no industry-wide standard for impact reporting and measurement. The United Nations’ Sustainable Development Goals (SDGs) are the most widely used method to measure impact, with 92% of managers aligning their impact investment strategies’ specific contributions to the SDGs.

Third-party data providers are coming to the table with solutions for data collection and aggregation, leveraging artificial intelligence, machine-learning algorithms, big data analysis, and natural language processing techniques to collect ESG information.

“These solutions could revolutionize the way asset managers report and the way asset owners understand the risks and opportunities associated with ESG investing,” Giuditta says.