The asset manager’s how-to guide to ESG reporting

Guide to ESG reporting - transparent

There has been an explosion in the popularity of environmental, social, and governance funds in recent years. In light of this growth, fund managers have been increasingly keen to step up their commitment to ESG and its measurement.

The rewards for those that get it right are high. An authentic ESG strategy that is evident through a firm’s products, their investment process and data-driven reporting is easy for existing investors to understand and attractive to prospects that value ESG highly.

Asset managers must demonstrate that their fund disclosures and reporting approach meets parameters which are strictly linked to ESG reporting criteria. But reporting is not an easy landscape to navigate when it comes to ESG.

The EU has started to implement the Sustainable Finance Disclosure Regulation (SFDR), which sets out rules for classifying and reporting on sustainability and ESG factors in investments. But whilst regulators and industry bodies across the globe play catch up, there has been a distinct lack of guidance for asset managers compared to other more established investment reports.

Despite this ambiguity, there are three principles ESG reports should adhere to: authenticity, substance and defendable data. Asset managers need to be transparent on the methodological approach followed in their investment strategy, implementation of governance and the reporting in place.

Today, most asset managers have several options to demonstrate the transparency and accountability of their ESG funds. But how these are implemented for reporting depends on the ESG strategy in place, and the jurisdiction in which the asset manager is operating.

Identifying and defining ESG activities and strategies

There are several ways an asset manager can incorporate ESG considerations into a fund strategy:

  • Regulatory alignment – This approach involves implementing ESG strategies that align with ESG regulation of the jurisdiction within which the fund is operating. The most notable of example of this is SFDR within the EU.

    • SFDR Article 8 - is where funds promote investments or projects with positive environment or social characteristics and with good governance principles, alongside other non-ESG traits. While sustainable investment is not an objective of the product, it remains an aspect of the investment process.
    • SFDR Article 9 - covers products that target a sustainable investment primary objective. A sustainable investment is an economic activity that contributes to an environmental or social objective. Products must comply with the ‘do no significant harm’ principle which means proving that the product does not in any way significantly harm any of the EU Taxonomy objectives.
  • Best-in-class – This approach includes finding the companies that are leaders in their sector in terms of meeting environmental, social and governance criteria.
  • Exclusions - This approach excludes specific investments such as companies, sectors, or countries based on specific criteria. Common categories include weapons, pornography, tobacco and animal testing.
  • Sustainability-themed - This approach involves investment in themes or assets linked to the development of sustainability. Funds can focus on individual or multiple issues related to ESG. Sustainability-themed investments contribute to addressing social and/or environmental challenges such as climate change, energy efficiency and health outcomes. Funds are required to have an ESG analysis or screen of investments in order to be counted in this approach, which can be performed by specialised ESG label providers.
  • Norms-based screening – This is the screening of investments according to their compliance with international standards and norms, and is one of the most commonly employed approaches. These include adherence to the UN Global Compact, Kyoto Protocol, UN Declaration of Human Rights etc.
  • ESG integration - This approach involves the explicit inclusion of ESG risks and opportunities in traditional financial analysis and investment decisions based on a systematic process and research. ESG integration means managers need to understand the potential impact of ESG issues on company financials, which may affect their decision to invest.
    • Environmental issues relate to aspects of a company’s activity that affects the environment in a positive or negative way. Examples include gas emissions, energy efficiency, resource depletion, pollution levels and the company’s impact on biodiversity.
    • Social issues address various community-related aspects, such as the improvement of health and education, to workplace-related issues, including the adherence to human rights, non-discrimination, and stakeholder engagement. Examples of such issues include labour standards, relations with local communities and approaches to talent management.
    • Governance issues concern the quality of a company’s management, culture and risk profile, among others. This includes board accountability and strategic management of social and environmental performance. It emphasises principles such as transparent reporting and the carrying out of management tasks in a manner that is free of abuse and corruption. Examples include corporate governance, bribery, corruption, stakeholder dialogue or lobbying activities.

Defining ESG strategy from the outset

Asset managers should use pre-sales documentation to lay out the ESG principles followed as part of the investment policy of the relevant fund. This section should describe the objectives followed in plain language.

Where previously it had only been best practice to provide this information, in the EU this has now become a regulatory obligation, with other countries set to follow suit. Under SFDR, UCITS and AIFMs must designate investment products as an Article 6, 8 or 9 fund, and make certain disclosures in-keeping with this choice. Fund managers must disclose how they integrate sustainability risks into investment decision making as well as the adverse sustainability impacts of the funds’ investments. These pre-contractual disclosures are required to ensure that investors have greater transparency before entering an investment product or accepting advice.

Asset managers should provide supplemental ESG-relevant information through their website, prospectus, factsheet documentation or any other type of ESG policy documentation. The pre-sales documentation should lay out clearly how any ESG approaches been implemented and will continue to be followed, to ensure that investors are given a comprehensive picture.

Evaluating relevant reporting categories and performance indicators

The type of information that is relevant to asset managers depends on the ESG investment approach The following could be reported as a minimum for each strategy:

  • Regulatory alignment – Make disclosures and meet reporting requirements in keeping with regulatory obligations. Under SFDR Articles 8, and 9 this includes disclosing that the fund is complying with ESG considerations outlined by the article choice.
  • Best-in-class - Average ESG-rating of the portfolio or sectors within the portfolio
  • Exclusions - Regular commitment to reviewing and updating the exclusions list, as well as updates to progress towards divestment
  • Sustainability-themed - The amount of the portfolio invested in the sustainability themes pursued
  • Norms-based screening - The amount of the portfolio invested in line with the selected norms
  • ESG-integration - Investment decisions and/or the relating investment value impacted by ESG considerations. Usually this is evidenced by analysis conducted either in-house or by sustainable finance market players.

Establishing internal data processes and collecting data

Asset managers can collect data on their ESG strategy through internal processes. Another approach is sourcing publicly disclosed information from companies in their portfolio, aggregating it and compiling a sustainability-themed portfolio report. To do so, asset managers should aggregate the data relative to the weight of the companies in the portfolio.

To estimate the impact of their portfolio, asset managers can make use of data providers that offer ESG impact conversion factors. Such factors are sector-specific and have been developed by aggregating reported impact information and comparing such information against investment in that sector. The result is a factor that is descriptive of impact per unit of currency invested in a specific sector (e.g. greenhouse gas emissions per $ million invested). Asset managers can apply these factors to their portfolio and estimate their impact for reporting purposes.

Deciding on the reporting format and frequency

It is common practice for asset managers to publish reports to investors on a monthly or quarterly basis, at the very least . As investor demands for transparency increase, the more frequent the reporting the better. Greater reporting frequency, without the operational burden, can be achieved with investment reporting software.

Asset managers will need to assess their existing reporting cycle and publications in order to identify whether information on sustainable financial products is best reported as part of, or separate to, existing reporting structures.

For firms that operate in the EU to be able to market investments as Article 8 or 9, they will need to review the whole lifecycle of products, from the initial product development and marketing, through to monitoring and reporting, updating policies and processes accordingly. EU-based asset managers can then choose to provide supplemental ESG-relevant information via their website, prospectus, factsheets and other types of ESG-dedicated documentation.

Sesame for asset managers

Related Content

26 May 2022 | ESG

4 top trends driving the ESG reporting agenda in 2022

Interest in ESG has increased exponentially in recent years and there has been no sign of slowing in 2022, so far. But it is not just inflows to ESG funds that has been increasing. As policymakers turn their attention to environmental, social, and...

6 May 2022 | ESG

SFDR Article 6, 8 and 9 products explained. What do the classifications mean?  

The EU has started to implement the Sustainable Finance Disclosure Regulation (SFDR), which sets out rules for classifying and reporting on sustainability and ESG factors in investments.  

Related content

8 Aug 2022 | Infographic

Top 5 Regulatory Reporting Challenges for Asset Managers in 2022
Asset managers have faced nothing short of a regulatory onslaught in recent years. With demands set to only increase, explore the top 5 challenges firms face when it comes to regulatory reporting.
Download now arrow-read-more

3 Aug 2022 | Blog

The Top 10 Asset Management Trends in 2022
In this blog, we look at the top 10 trends shaping the asset management industry in 2022 and their implications. 
Read blog arrow-read-more

28 Jul 2022 | Blog

Quarterly Regulatory Round-up: Q3 2022
In this regulatory round-up, we break down the key regulatory updates and their practical implications for EU and UK-based asset managers in the coming months.
Read blog arrow-read-more

27 Jul 2022 | Checklist

Client Reporting for Asset Managers

For emerging managers, exceptional reporting can go a long way to creating loyal clients and greater client retention. Identify where you could make efficiencies and upgrade your reporting with this checklist.

Download now arrow-read-more

4 Jul 2022 | Blog

The asset manager’s how-to guide to ESG reporting
Asset managers must demonstrate that their fund disclosures and reporting approach meets parameters which are strictly linked to ESG reporting criteria. But reporting is not an easy landscape to navigate when it comes to ESG.

Today, most asset managers have several options to demonstrate the transparency and accountability of their ESG funds. But how these are implemented for reporting depends on the ESG strategy in place, and the jurisdiction in which the asset manager is operating.
Read blog arrow-read-more

1 Jun 2022 | Blog

How Sesame Revolutionises Reporting for Asset Managers
As investor service expectations evolve in their pursuit of clearer insights, new risk metrics and visually compelling reports, asset managers need the on-demand flexibility to keep up.  Find out how Sesame revolutionising reporting for asset managers. 
Read blog arrow-read-more

31 May 2022 | Blog

The Ultimate Guide to Offshore Trust Jurisdictions
When deciding which jurisdiction is the most suitable for an offshore trust, there are several factors to consider. In this blog we explore the top locations to set up an offshore trust.
Read blog arrow-read-more

26 May 2022 | Blog

4 top trends driving the ESG reporting agenda in 2022
Inflows into ESG funds have increased exponentially in recent years, but what is shaping the ESG agenda for asset managers?
Read blog arrow-read-more

13 May 2022 | Blog

6 things you need to build investment reports that clients love

Investors now expect on-demand, granular reporting, and legacy processes are straining under the pressure.

Through conversations with asset and private wealth managers our Client Operations Director, Kathleen Henrick, has identified six key requirements for creating investment reports that clients love.

Read on to find out what they are

Read blog arrow-read-more

6 May 2022 | Blog

SFDR Article 6, 8 and 9 products explained. What do the classifications mean?
In this article we dissect what is meant by SFDR Articles 6,8 & 9 and the implications for asset managers.
Read blog arrow-read-more

4 May 2022 | Guide

10 things to avoid when choosing an investment reporting provider

Selecting a digital solution for data consolidation and investment reporting is a big decision, one many asset and private wealth managers cannot afford to get wrong. It can be hard to know where to start when assessing a provider, and there are many pitfalls.

Discover the 10 key things to avoid when choosing an investment reporting solution.

Download now arrow-read-more

19 Apr 2022 | Blog

Why investment reporting needs to change

Across the investment management spectrum, the need for a radically different approach to investment reporting has never been greater.  

In this shifting landscape, implementing a data-driven, agile approach to investment reporting can help asset and wealth managers get back ahead of the game. 

Read blog arrow-read-more

15 Apr 2022 | Webinar

Risk management: What do allocators expect?
Watch as our expert panel discuss the best practices in risk management and what asset managers need to ensure they can attract institutional capital, at a time of increased market volatility and increasing allocator expectations.
Watch now arrow-read-more

29 Mar 2022 | Blog

The best practices in investment risk management you need to follow in 2022

For risk management, the ability to demonstrate extensive expertise alongside a deep understanding of the investment side of the business is crucial. But what best practices do firms need to follow to achieve an institutional-level standard of risk management? 

Read blog arrow-read-more

23 Mar 2022 | Whitepaper

Risk management: What do allocators expect?

An in-depth guide to risk management featuring insights from asset management and due diligence professionals.


Download now arrow-read-more

10 Mar 2022 | Blog

Portfolio analytics: Why cloud solutions are the future
The need to manage large volumes of data and perform complex calculations at speed have left many firms’ legacy systems and outdated technology struggling to keep up.  It’s time to take to the cloud. 
Read blog arrow-read-more

1 Mar 2022 | Blog

5 reasons you need a wealth management API

As fast, sophisticated data management becomes business critical, what are the benefits data APIs can offer your organisation?

Read blog arrow-read-more

15 Feb 2022 | Blog

Cloud-based investment management software: 5 reasons you can’t afford anything else  

In a world of rising client, regulator and staff expectations, portfolio and risk management capabilities quickly become outdated. Cloud-based platforms offer the solution.

Read blog arrow-read-more

11 Jan 2022 | Blog

The cost of meeting allocators' risk management expectations for asset managers

Implementing a fit-for-purpose risk management and reporting function is expensive. But for asset managers, the cost of sub-standard risk capabilities is even higher.

Read blog arrow-read-more

16 Dec 2021 | Case Study

Landytech Helps Hedge Fund Achieve Substantial Cost Savings

After a recommendation from a market peer, a UK-based multi-strategy hedge fund approached Landytech for a managed solution that would provide expert risk management support, as establishing and maintaining this function inhouse would come at significant cost. Read the full case study here.

Read case study arrow-read-more

15 Dec 2021 | Blog

The 5 must-have capabilities for managing the risk function in-house

So you know you need a robust, institutional-grade risk management capability to attract investor allocations and meet clients’ ongoing demands. But what does a fit-for-purpose risk management and reporting function entail in practice?

Read blog arrow-read-more

7 Dec 2021 | Blog

4 things asset managers should look for in a risk management provider

Faced with demanding investor and regulatory expectations, asset managers are increasingly turning to third-party risk management providers.

Read blog arrow-read-more

24 Nov 2021 | Case Study

Equity Manager Transforms Risk Management and Institutional Client Reporting Process with Sesame

Skerryvore Asset Management needed a sophisticated risk management and data analysis platform to meet the exacting due diligence requirements of institutional investors and so help grow its business. Read the full case study here.

Read case study arrow-read-more

18 Nov 2021 | Whitepaper

The True Cost of Risk for Asset Managers

Comprehensive risk management capabilities are an integral and growing ingredient in asset manager success. Since the 2008 financial crisis, the value a strong risk management infrastructure and team bring has moved to the fore. Download our whitepaper examining the true cost of risk for asset managers.

Download now arrow-read-more