What do increasing ESG data demands mean for hedge fund managers?

Key takeaways from the HFM European Operational Leaders’ summit ESG data conference

The drive to ESG investing has undoubtedly changed how investors, clients and regulators view investment portfolios. It is now common for investors to ask hedge fund and private equity managers for complex, detailed ESG data sets for their investments.

At the same time, regulators are demanding more detailed ESG data reporting, although there is currently no standard way to provide or present this.

This call for more timely and accurate reporting will not go away. Quite the opposite. Nor is it limited to European funds. ESG data reporting is becoming a global issue for managers in all jurisdictions. At the recent HFM European Summit Intertrust Group’s Jonathan White joined an expert panel of European hedge fund sector leaders to discuss the resulting challenges in Data Ecosystems and Strategies: Complexity, Investor Demands and Scalability for ESG data and reporting.

What are the key ESG reporting challenges for hedge fund managers?

The panel outlined three key operational challenges for hedge funds:

• Collecting and analysing a great deal of complex data
• Being able to scale up where necessary
• Adapting to rapidly changing requirements

The drive for coherent and detailed ESG data increases the time and cost involved in collecting, collating and codifying vast amounts of portfolio information. Fund managers increasingly find the overwhelming demands interfere with their core activities of investment management and alpha generation.

Can we predict how the ESG data landscape will develop?

While most agree that the drive towards ESG investment and reporting is welcome and here to stay, there is currently no standardised method of delivering and presenting data.

Standardisation is probably about three to five years away. In the meantime, managers are struggling to provide data to meet the demands of both investors and regulators.

And while technology can help, it is perfectly possible to find a solution to accommodate current requests from investors, only to find that demands have changed in a few months. Fund managers are struggling to keep up with these constantly changing standards.

ESG data must be transparent and adaptable to respond to this unpredictability and rapid change. That is why many organisations are turning to specialist tech partners to provide flexible solutions. Service providers can offer guidance and expertise in customising ESG reporting standards and building a scalable and future-proofed system for collecting and presenting data.

What are the implications of getting ESG reporting wrong?

Apart from the regulatory sanctions that might be triggered by failing to provide coherent ESG reporting, there is also reputational risk for hedge fund managers.

Managers want to be able to provide information in a timely and organised way for regulators and investors. But they are concerned about getting the process wrong, which could lead to a misrepresentation of their activities.

By being able to quantify and analyse ESG data within an investment portfolio, managers de-risk their holdings and can mitigate against accusations of ‘greenwashing’.

How can a tech partner help hedge funds and private equity report ESG data?

A tech partner like Intertrust Group has the infrastructure, knowledge and understanding to take on data collection, analysis and reporting, leaving fund managers to focus on investors and their core investment strategies.

A partnership allows managers to gather and normalise vast amounts of disparate data, providing tools for more accurate and flexible reporting outcomes. This can then be presented in a coherent data set that satisfies investors and regulators.

Having a single data set can be useful for managers of funds of all sizes, but is particularly helpful for smaller, start-up funds, or firms wanting to improve time and cost efficiencies by no longer trying to manage all their data obligations in-house.

An expert partner can remove some of these challenges and provide advice, guidance and infrastructure without affecting the company’s core investment activities.