Thriving In Change: Navigating Sustainability in Asset Management

Sustainability factors are becoming increasingly important for Asset Managers in North America due to both growing momentum towards sustainability regulation as well as commercial pressures from investors. Regarding the former, regulatory disclosure requirements around sustainability have been approved at both the national and state level, forcing Asset Managers to adapt their processes. Concurrently, investor demand has increased for sustainable considerations in Asset Manager product and portfolio offerings to clients. Consequently, while sustainable investing represents a significant opportunity for Asset Managers, navigating the complex regulatory landscape and meeting the unique demands of clients requires a well-formulated approach to understand and implement sustainability factors in investment processes and reporting.

Outside of adopting sustainable investing processes to meet regulatory requirements, Asset Managers can also leverage sustainable investing practices to generate opportunities in the following areas: 

• Meeting sustainability demands of younger generations as they accrue an increasing share of global wealth.
• Attracting and retaining clients to pooled funds marketed for sustainability and separately managed accounts with custom sustainability requirements.
• Positioning the firm to be more attractive for recruiting and retaining talent.
• Generating increased fees from sustainable versus non-sustainable products and from client performance incentives around sustainability. 

Asset Managers face several key challenges in managing the implementation of sustainability in their investment processes, including understanding scope and needs, navigating evolving regulatory standards, sourcing sustainability data, ensuring data integrity, integrating into existing processes, and generating sustainability reports for clients. 

Regulations evolve continuously with varying timeline requirements, unclear metric definitions, and undefined calculation methodologies. In the United States, regulations such as the Securities and Exchange Commission (SEC) Climate Related Disclosure Rules and the SEC Names Rule Amendment are reshaping the industry. While in Canada, the Office of the Superintendent of Financial Institutions (OSFI) Guideline B-15 on Climate Risk Management sets expectations for the management of climate-related risks. As regulators issue and revise sustainability requirements, it can be challenging to understand which regulations are applicable to an Asset Manager, particularly across differing regulatory regimes and required reporting timelines. In the US, there are many states with both pro- and anti-Environmental, Social, and Governance (ESG) legislation, both proposed and passed, further complicating the landscape for Asset Managers operating in multiple states. Additionally, client demands around sustainability reporting represent a new and growing challenge for Asset Managers, particularly regarding custom demands that may not be met by investing in commingled products. 

Upon understanding application, a further challenge can emerge in the form of determining reporting frameworks associated with various regulations.  Reporting frameworks such as the Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and International Sustainability Standards Board (ISSB) provide guidance for Asset Managers, but the lack of a single standard can result in differing interpretations, calculations, and reporting methodologies for Asset Managers.  

Asset Managers must also determine how to source sustainability data, with sources potentially including external vendors as well as internal investing teams. Beyond determining data sources, challenges lie in ascertaining in-scope asset classes, the procedure for weighting and aggregation, portfolio versus benchmark tracking, fund look-through considerations, quantitative data versus qualitative commentary, and any vendor licensing agreements around data dissemination to outside parties, including clients. 

Upon determining data sources and calculation methodologies, a further challenge emerges in ensuring the ongoing integrity of sustainability data. Mismatches of sustainability data across Asset Manager systems may emerge from differences in areas such as data sourcing, pricing methodology, issuer hierarchies, look-through functions, and trade backdating. Differences in sustainability metric figures across systems may erode internal confidence in sustainability data and consequent reporting misalignment may lead to regulator or client accusations of “greenwashing”. 

Updating processes to incorporate sustainability data alongside existing traditional investment metrics in the investment, performance, and reporting functions can also be a major challenge. Ensuring front-, middle-, and back-office functions are aligned for the collection, integration, and reporting of sustainable factors requires the implementation of new processes and procedures. Investment managers need to ensure that personnel in all impacted roles are trained and can effectively execute the additional responsibilities necessitated by the incorporation of sustainability factors. 

Reporting on sustainable factors can also create challenges with requirements to either create new reports or to modify existing ones. There is often a desire for qualitative reporting to complement and explain quantitative sustainability metrics and trends, both at an absolute portfolio level and against benchmarks, which may require a human element alongside automated quantitative metrics. In addition, some clients may request custom reporting around sustainability as part of their Requests for Proposal (RFPs) and will also embed sustainability reporting requirements within their Investment Management Agreements (IMAs).  

Sia Partners is a next-generation management consulting firm. Our Wealth and Asset Management practice provides industry-leading solutions to solve the most complex problems. Sia Partners consultants cover a wide range of expertise across the front, middle and back-office functions of Asset Managers. We offer a unique blend of artificial intelligence (AI) and design capabilities, augmenting traditional consulting to deliver superior value to our clients. We augment business advisory services with automation and AI.

Discover our take on The Role of Artificial Intelligence in the Asset Management Industry. 

We can help Asset Managers define their sustainability scope, considering both regulatory needs and commercial considerations across countries and regions. Our internal Sustainability Team is constantly monitoring the market and assisting our clients in understanding what is required by regulations, what is recommended by frameworks, and what may be desired by investors. Sia Partners has experience working with Asset Managers to determine asset class and portfolio scope, metrics to be tracked, and data points for reporting to clients and regulators.  

We can also help Asset Managers navigate the lack of standardization and regulations around sustainable investing. We provide guidance on industry best practices and emerging regulations and guide Asset Managers in developing consistent and transparent reporting standards to meet the increasing demand for sustainability disclosures. For example, Sia Partners Rapid Assessment Tool allows clients to quickly identify the gaps needed to meet the SEC Climate Related Disclosure Rules. The Tool provides a quick overview of an organization’s alignment with the SEC’s requirements, generates a snapshot of alignment across the organization, and assists in evaluating the need for any in-depth assessment. 

Asset Managers can also enlist Sia Partners to assist in evaluating data sourcing options, both internal and external, to meet sustainability requirements. Our partner, Greenly, offers automated technology to integrate and track financed emissions and to assist in meeting regulatory compliance needs and sustainable finance disclosures. Greenly tracks greenhouse gas (GHG) emissions in dashboards, disclosure reports, and personalized analytics. Once sourcing is determined, we have experience working with Asset Managers to decide how to approach sustainability data across asset classes, determine in-scope and out-of-scope portfolios, align on desired metrics, incorporate benchmark data, and evaluate fund look-through needs. We also have experience in evaluating vendor contracts to determine whether proprietary data points can be disseminated outside the organization and whether such dissemination applies at the issuer level or in aggregate.  

Sia Partners can supports Asset Managers in designing a structure to ensure data integrity and guard against claims of “greenwashing”. We have experience in identifying and resolving causes of sustainable data differences and in implementing data quality checks to ensure ongoing, automated identification and escalation for resolution. We work to evaluate data flow and ensure data integrity when raw sustainability data is initially received into systems, as well as when it is combined with portfolio data and transferred between systems. In addition to quantitative data, we also possess experience working with Asset Managers to incorporate qualitative sustainability commentary. This may be drafted by humans, or increasingly, by AI. Sia Partners augments consulting services by leveraging Heka.ai, our ecosystem of AI solutions. SiaGPT is the Generative AI technology we leverage to extract relevant sustainability information and generate unique content based on our clients’ selection of a vast number of internal or external documents within their own secure environment.  

Implementing sustainability in asset management processes requires coordination across a variety of Asset Manager functions. Sia Partners has experience working with Asset Managers to integrate sustainability metrics and reporting into existing investment management processes across the front, middle, and back office. We can set up the infrastructure to ensure implementation proceeds along defined timelines and provide support in the form of project managers, business analysts, and subject matter experts. Our consultants have prior experience implementing sustainability processes and procedures both in North America and Europe and can leverage their experience to assist Asset Managers integrating sustainable metrics, while avoiding potential pitfalls encountered in implementation.  

Sia Partners consultants have experience both in reviewing RFPs for custom sustainability reporting requirements of Asset Managers and in tracking development of configurations to meet requirements. We work with Asset Manager reporting teams to source feeds into reporting templates, both standardized for commingled funds, as well as for customized reports to meet IMA requirements. SiaXperience can guide clients in the development of their corporate communications, including the design and delivery of reports, communications, and websites. Additionally, SiaXperience can perform readiness assessments to determine ability to deliver on new reporting frameworks.