Examining ESG risks from “outside-in”

Alexandra Mihailescu Cichon

RepRisk: Best ESG Data Provider — Can you outline the asset management industry trends that have been driving growth and development within your firm over the past year?

When Covid-19 emerged in early 2020, many thought it would slow down the focus of ESG, but it had the opposite effect. Covid-19 showed people, in a tangible way, just how interconnected our environment, our society, and the economy are. The past year put into sharp focus just how much unprecedented and unpredictable events like Covid-19 not only lead to new ESG risks – but also reveal existing risks that might not have come to light otherwise, such as what we saw with Boohoo’s case.

The pandemic also helped elevate the “S” in ESG. We polled our clients on found that 50 per cent said that Covid-19 helped strengthen ESG views within their organisation, and 80 per cent saw Covid-19 as a potential risk factor.

Like Covid-19, the protests about social and racial injustice also helped to highlight the “S” in ESG. It brought to the fore the topic of discrimination generally, and of racism and racial inequality specifically.

It’s a very exciting time to be in the field, especially with the recent shift – meaning it is now accepted and understood that having a risk-focused approach is a key part of ESG. And that looking beyond company disclosures is key. This has been our approach since the beginning – we believe it’s the best way to generate meaningful, actionable ESG signals.

How have client needs and demands changed specifically in relation to asset management and what has your response been in terms of your offering?

Now more than ever, it has become clear that ESG risks can translate into bottom line compliance, financial, and reputational impacts for companies – and how crucial it is that the datasets used for decision-making are reliable, timely, and of high quality. This is where RepRisk comes in. Risk management is in our DNA – and risk management is also essential when looking at ESG.

RepRisk looks at ESG risks through a unique ‘outside-in’ approach, which means that we intentionally exclude company disclosures and reporting from our research – and instead look at external sources and stakeholders such as news websites, NGOs, regulators, and think tanks – essentially providing clients with a ‘reality-check’ on how companies are managing ESG issues and conducting their business on the ground.

This approach is powered by a unique combination of AI and machine learning, together with human intelligence. Technology is key in helping us deliver speed – and the size and scale of our dataset – while our analysts help us curate and analyse the data captured by our AI. This combination means we can deliver actionable data to our clients that cuts through all the noise – and with the timeliness and coverage that they need. This leads to a dataset that is unique in the industry: the world’s largest, daily-updated dataset with more than 170,000 public and private companies worldwide, across every sector and market, including emerging and frontier markets.

As a result, our clients can leverage actionable, decision-relevant data that supports ESG integration across asset classes – not only for equities, but also for fixed income, private equity and debt, infrastructure investors, hedge funds, and more.

What are the primary challenges asset managers are facing and what is critical to these being overcome?

Numerous studies and surveys have shown that data is the biggest challenge for investors when it comes to integrating ESG. With some of the most frequent challenges from asset managers revolving around the reliability, transparency, coverage, and timeliness of ESG data.

There is a lack of standardisation and confusion around what ESG data and ratings mean and what they are supposed to measure. And as most data is based on companies self-reported data – this can lead to unreliable and biased datasets that masks risks. Many ESG data providers also have ‘black-box’ methodologies that aren’t transparent and lack the coverage investors need – in particular for small caps, and in emerging and frontier markets. Lastly, there is also the issue of timeliness – most ESG data is updated on an annual or quarterly basis which does not allow for actionable insights.

In response to these challenges, RepRisk deploys a clear and simple use case: to identify and assess material ESG risk that have financial, compliance, and reputational implications so that financial institutions have the actionable intelligence to make the best financing, investment, and overall business decisions.

As mentioned, we exclude company disclosures and only look at media and stakeholder sources – screening 100k+ sources in 23 languages to capture risks early, at the local level. By starting with the ESG risk first and not a limited set of companies, we cover any company or infrastructure project – across all sizes, markets, and sectors. Our data is based on a transparent, rules-based methodology, generating consistent data that goes back approximately 15 years. Importantly, the data is not back-engineered but generated point-in-time and hence, our daily time series across 170,000+ companies are ideal for back-testing – and can also be used to generate alpha. For example, a 2020 research report from Bank of America Securities confirmed that RepRisk data is an effective alpha signal that can deliver investment outperformance and reduced volatility across all geographies, sectors, company sizes, and investment styles.

What are your business objectives for the year ahead and how do they align with the needs of your clients?

Innovation is also top of mind for us. With technological advances there are a variety of new datasets available that can be used for ESG risk management. RepRisk has focused on geospatial ESG risk data; in 2019 we started by mapping the coordinates of mining and oil and gas infrastructure projects in our database to their respective GPS locations. We can then overlay geospatial data on environmentally sensitive areas – and for example, see if a mine is located on or near a designed protected area or a UNESCO World Heritage Site. Because RepRisk has data on both projects and companies, we can link back that mine to the companies that own or operate it.

Additionally, we are building out additional breadth and features. Let me give you several examples:

• Adding new languages and expanding our research scope in line with trends and client demand: we added Polish, Thai, and Turkish language coverage this year to strengthen coverage in Europe and Asia, and we added new ESG hot topics so that clients can monitor ESG risks in line with new developments, such as pandemics and racial inequality.

• We have been working on mapping our data to the commonly used frameworks in the ESG space, in addition to our existing UNGC Principles mapping. In 2020, we launched our SASB lens (integration of the SASB Materiality Map). In March 2021, we unveiled our SDG risk lens (integration of the 17 UN Sustainable Development Goals).

• And also related to metrics, we have been working on a suite of new customisable risk metrics, where clients can customise parameters to create a score that clearly reflects their risk appetite and ESG framework.

• Finally, we’re also working to harness opportunities in the market and broaden the access to RepRisk data – and we’ve done that by making our data available via strategic partnerships and on third party distribution channels – such as BlackRock, ICE Data Services, FactSet, Crux, just to name a few – so clients can have streamlined, integrated access wherever they want it.

What is your outlook for the asset management industry for the coming year and how is your firm best placed to support clients in navigating the environment?

We anticipate that the importance of transparency will continue to grow in the asset management industry. As asset owners demand more transparency from their asset managers, asset managers demand more transparency from their data providers, and regulators demand more transparency from everyone – the importance of transparent ESG data will continue to be of growing importance. This is an area where we have been ahead of the curve on – our clients and partners have always been able to access how we identify and analyse risks, as well as how we build our risk metrics. We also see the market demand for this as well, with many organisations turning away from ‘black-box’ methodologies and reverse-engineered datasets.

ESG is no longer a nice-to-have, but a must-have. In 2021, how a company manages ESG issues is now accepted as a sign of how future proof they are in an ever-changing world. This is linked to why our clients come to us – because we can help them systematically identify, assess, and monitor ESG risks in their business – whether that is in their investments, in their client or supplier portfolio, or in their own operations. We expect that investment strategies will integrate into ESG – and not the other way around. This is in part because over the past few years we have experienced how ESG risks are directly linked to compliance risks, reputational risks – and of course, to financial performance. 

Alexandra Mihailescu Cichon (pictured), Executive Vice President, Sales & Marketing
Alexandra Mihailescu Cichon joined RepRisk in 2013 and is the Executive Vice President of Sales and Marketing. Over her tenure, she has established and led RepRisk’s globally distributed Sales, Partnerships, Client Relationship Management, Sales Operations, and Marketing & Communications teams.