How do you solve the DFM ESG data problem?

Technology is essential for getting reporting right says Quilter Cheviot's Gemma Woodward

Discretionary fund managers (DFMs) have an ESG problem. It’s not that there is a shortage of appetite from investment managers to consider ESG factors, nor is there a shortage of demand from clients, but we have a problem around the provision of ESG data and ESG reporting to each and every client – numbering in the tens of thousands – when each portfolio is unique.

Reporting requires the provision of data on an industrial scale. Product and fund providers can achieve this scale as they just need to gather ESG data for their product, which will be relevant and useable for each and every investor in that fund. Likewise, if you cater for the institutional market then it’s a pretty nice life as you have the product.

DFMs, on the other hand, will have tens of thousands of clients, each having their own bespoke portfolio based on their own concerns and preferences. Our investable universe is huge and there will be a considerable challenge for DFMs over the coming years in figuring out how to report ESG information on each and every portfolio to clients. Otherwise DFMs start to look like the poorer relative, in ESG terms, despite the fact that managers can offer a service much more tailored to a client’s ESG preferences.

Power of technology

So how can DFMs provide meaningful impact reports to clients that provide an accurate picture of their portfolio? Well, we believe the answer lies in technology combined with the human touch.

Technology is essential so that you can report data on impact across tens of thousands of individual portfolios in an accessible way without it becoming overly burdensome.

Technology must also make the reporting process as engaging as possible for clients. There is no point developing an expensive reporting system that provides a report to clients that is left to gather virtual dust. It must be engaging and bring to life the benefits of responsible investments, while properly considering the risks. 

And incorporating a human touch is essential for tackling the reporting challenge. DFMs hold an awful lot of investments for their clients, with the investable universe being larger still. ESG considerations must be incorporated into the whole investment selection process, from research analysts up, and not just considered in isolated pockets.

But underpinning the reporting problem is another challenge that still seems to be widespread, and that is the ongoing confusion around definitions. We still see confusion around the difference between responsible investments and ethical investments. Once more, what is ethical for one person is completely different to someone else, and as a consequence their ‘ethical’ investable universe will be completely different. There can be no meaningful ESG reporting without getting to the bottom of what you will be reporting on to your client, and whether it accurately reflects their preferences.

There’s no denying DFMs are in a very good place when it comes to providing high-quality responsible investing services to clients. They can spend a considerable amount of time with each individual client to get to the bottom of their ESG concerns to build a truly unique portfolio that is bespoke to their preferences.

But it’s essential they get the reporting right and provide meaningful data to clients on the impact of their investment decision, as this is where the true value lies and will encourage much more engagement in the future, which can only be a good thing.

Gemma Woodward is director of responsible investment at Quilter Cheviot and an ESG Clarity editorial panellist.


Natasha Turner

Natasha was global editor at ESG Clarity, part of Mark Allen Financial, and a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the Year...