1) How is the phenomenal growth of sustainability as a theme in financial markets impacting operations on the buy side?

We continue to see significant growth in packaged investment products that are focussed on sustainability credentials, including everything from climate change to broader environmental, social and corporate governance (ESG) considerations. Buy-side firms that choose to pursue this opportunity need not only high-level sustainability data (such as ratings and scores from third-party providers), but also the granular underlying data, so they can create their own proprietary quantitative models to ensure they understand the true sustainability impact and risks of their investments.

In addition to ensuring they have good-quality, consistent data today, firms should continually re-evaluate and optimize their procedures and data sources, as there are no clear and universally accepted best practices yet. Firms need to think beyond the initial investment due diligence by implementing processes to track the ongoing impact and performance of their investments.

Ensuring they have good-quality data and robust procedures will help firms to align with initiatives such as Net Zero and meet disclosure requirements, such as the Taskforce on Climate-Related Financial Disclosures (TCFD) and the Sustainable Finance Disclosure Regulation (SFDR).

2) Many firms are expanding their portfolios to include exposure to private assets. What challenges does this raise from a sustainability perspective and how are firms adapting?

As firms continue their quest for alpha generation, diversification and impact, many are now looking beyond traditional investments in public markets by expanding into private markets. This presents a number of challenges. While there are still issues with data quality and accuracy within the public markets, there are at least accepted standards and benchmarks that firms can align to. The situation is very different for private investments.

The first challenge firms must overcome is access to data from private companies. The next hurdle is that data from these private investments may leverage different reporting taxonomies with varying data definitions. Some buy-side firms attempt to address this data challenge by leveraging proxy and estimated data from third-party providers. While proxy data can help build out initial internal processes and align to internal reporting frameworks, it is important to have a long-term plan to replace it with accurate data sourced directly from private companies. This is something we are helping firms with.

As firms expand the scope of their portfolios beyond the public markets, they need to be in a position to not only be transparent about the exposure and makeup of their portfolios, but also to drive accountability for their investment theses.

3) SFDR is garnering a lot of attention in Europe. What can firms do to streamline their compliance with these and future regulatory requirements?

The goals of SFDR are to reduce greenwashing, focus on sustainability risks during due diligence and streamline mandatory sustainability disclosures. As there are requirements to disclose information at both a product and entity level, firms must first understand the classification of their investments. For example, are their investment products marketed as not integrating sustainability data into the investment process? Do the products advocate for better governance of environmental and social impacts, but not incorporate this into the investment thesis? Or do the products have sustainable investment as their major objective and tie measurable sustainability targets into the investment thesis?

Once firms understand these classifications, they will need to implement policies and procedures to procure the required information from deal sponsors, underlying companies, and third-party providers. As this is a new regulation, there are no established best practices to follow yet. As a result, firms will need to be able to scale their processes using technology and will need to continuously re-evaluate and optimize the data, systems, and procedures they have in place today. Firms can simplify the process of compliance by adopting integrated data and technology solutions.

• Learn more about our solution for streamlining compliance with sustainability regulatory reporting requirements.

• Find out how our partnership with Novata streamlines sustainability data collection for private market investors.
• White paper: Find out how other buy-side firms are integrating sustainability mandates into their operational processes

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.