As ESG becomes an increasingly critical input into decision making at the corporate level – driven by regulations and the fast-developing taxonomies which underpin them – as well as in the asset allocation discipline among fund managers, demand for filtering mechanisms has increased at the end-user level.
These constitute objective fintech-driven frameworks which are able to identify via the agglomeration and deep analysis of reams of data – often via deploying artificial intelligence – whether corporations are meeting their environmental, social and governance (ESG) mission statements, as well as the asset managers which claim strong credentials in that arena.
Meanwhile, credit ratings, which make judgments based on a borrower’s ability to service and redeem debt, are increasingly playing second fiddle to ESG scores, with the latter measuring an entity’s adherence to crucial measures relating to sustainability, social impact and corporate governance, on a forward-looking timeline extending years into the future.
These scores implicitly take into account various crucial factors, including an entity’s exposure to government regulatory action, and the risks posed therein – for example, within the fossil fuel industry it is the risk of stranded assets for companies as renewable energy transition takes hold and regulations become more stringent globally, with the aim of meeting the targets outlined in the Paris Agreement.
At the same time, there is the risk of disinvestment by large institutional money, for entities that fail to tick the ESG boxes, accompanied by headline risk posed for those associated with ESG-related scandals, ranging from environmental degradation to the use of slave labour in supply chains.
And asset managers which boast of proprietary models which adhere to ESG factors face greater scrutiny than ever before as fintech allows end users to weed out “greenwashing” wherein on closer scrutiny, it is discovered those models have allowed assets into portfolios which run counter to ESG scoring metrics.
An emerging player in this fast-growing space is fintech portal BlueOnion, founded last year by industry veteran Elsa Pau, whose experience with family offices in Asia convinced her of the need to delve deeper into asset managers’ qualitative and sustainability performance, underpinned by a mission statement that focuses on investor protection.
“BlueOnion emerged from the work I had done with family offices, which in recent years had begun to develop cognizance of the ESG-compliance of products being marketed to them,” says Pau.
“Issues arose in relation to matters such as greenwashing, compliance with fiduciary duty, stewardship and voting disclosure. It became apparent that a filter was needed to identify which asset managers were really walking the walk rather than simply talking the talk in relation to ESG-conscious investing.”
BlueOnion is headquartered in Hong Kong, an international financial centre which is starting rapidly to embrace ESG and the maxims of sustainable and green finance, driven by private sector demand, rising awareness among retail investors and support from government regulation.
The portal connects the buy and sell sides globally, delivering proprietary data on sustainability and the qualitative performances of investment managers, providing a first layer of due diligence for the buyside. Some 47,000 primary funds are tracked, across 14 countries and investing in 125 sectors.
“Twin transformation” – a business strategy that involves the deployment of digital transformation and actions led by sustainability factors and the broader considerations of ESG, fuelled by talent – is moving front and centre in boardrooms and among asset managers as the global economy struggles to find its way out of the Covid-19 pandemic.
The alliterative term, which was on the lips of almost every mover and shaker at the World Economic Forum in January, might seem like a buzz phrase which simply describes what is already happening anyway, accelerated by the epiphanies provided by the pandemic and its profound impact on economies and the corporate landscape.
Nevertheless, the vision it encompasses is now seemingly inescapable, and even the stodgiest of corporate boards and recalcitrant CEOs are accepting its parameters with a sense of urgency.
Digital transformation and the newly calibrated focus of the US administration on sustainability and meeting the goals of the Paris climate accord are a powerful synergistic force, and the former is bearing down on the latter, such that in a data-driven era, there is “no place to hide” for those in the asset management industry.
Data – in many cases big data – increasingly analyzed via artificial intelligence and machine learning conjoined with the specific functionality of filtration portals, such as BlueOnion’s – will see to that.
“Digital is not a vertical industry. It is an enabler for all transformation. From Brown to Green, sustainability transformation from Ground Zero to Net Zero is digitally led, and AI and machine learning in the data analytics empower clarity,” says BlueOnion’s Pau.
As ESG-focused taxonomies are rolled out globally and regulations ramped up, the pressure on asset managers increases exponentially, and their fiduciary and stewardship functions more subject to scrutiny than ever before. It is hoped that the European Union’s exhaustive Green taxonomy, unveiled last June, will become a template for the direction of ESG-focused regulatory travel in the US under the Biden administration.
“The new administration will make up for the time that has been lost over the past four years and usher in a period of heightened awareness towards measures needed to be taken to address climate change and, more broadly, other aspects of ESG within the corporate and investment landscape,” says Pau.
“US asset managers have had no critical pressure to comply with the strictures of the Paris accord over that period, but that is about to change, arguably at great speed.”