January 16, 2024

ESG Analytics for Funds: Challenges and Opportunities


The increasing importance of environmental, social and governance (ESG) in the financial world has ushered in a new era for fund managers. Some talk about impact, others talk about ESG, others talk about sustainability — in the end, it's the same: the same opportunities and challenges. Integrating ESG factors into investment strategies is not only an ethical necessity, but also a way to maximize long-term financial returns. This article highlights the challenges of acquiring ESG and climate data for fund managers and highlights the benefits of portfolio managers acting transparently on ESG issues. The difference between Articles 6, 8 and 9 Funds is also explained.

The consequences of climate change are complex and also have an impact on the capital market

Challenges in acquiring ESG and climate data

1. Data availability and quality: Obtaining high-quality ESG data is one of the biggest challenges for fund managers. Data can be inconsistent and inconsistent, making it difficult to compare companies and sectors. The variety of sources makes it difficult to select reliable data sources.

2. Lack of standardization: The lack of global standards for ESG reporting results in a jumble of metrics and criteria. Companies can report according to their own guidelines, which impairs comparability. Standardization is critical to enable coherent analysis.

3. Dynamic nature of ESG risks: ESG risks are dynamic and subject to constant change. External influences such as legislative changes, technological developments and social movements can have direct effects on companies. Fund managers must be able to adapt to these changes.

AI as a solution

In the era of advanced artificial intelligence, particularly with large language models and transformer architectures, there is new potential for overcoming the challenges of collecting Scope 1, Scope 2 and Scope 3 data, even for small and medium-sized companies.

Advances in data extraction and analysis, supported by AI, enable the automated collection of environmental data from various sources and create a more comprehensive and standardized data set.

At Bavest, we offer ESG data, climate data as well as fund analyses and portfolio evaluations for post-sustainability funds. Even for funds without an ESG focus. With our AI technology, we are able to collect and evaluate comprehensive ESG data for small, mid and large caps and generate deep insights for our asset management clients. Find out more about our solutions here: Our ESG- & Climate Solutions 

Benefits of transparent portfolio managers on ESG issues

1. Risk management: Transparent portfolio managers who actively consider ESG risks can identify potential financial risks early on and manage them better. This can result in more stable and sustainable returns.

2. Reputation and investor confidence: Investors are increasingly placing emphasis on sustainable investments. Transparent portfolio managers who disclose their ESG strategies gain the trust of investors and can strengthen their reputation.

3. Long-term performance: ESG-oriented portfolios have the potential to generate stable returns over the long term. Transparent managers who actively implement sustainable principles can identify valuable investments in the long term.

Difference between Articles 6, 8 and 9 Funds

The distinction between Articles 6, 8 and 9 Funds relates to the categories of the Regulation on Sustainability-Related Disclosure Requirements in the Financial Services Sector (SFDR):

  • Article 6 Funds: Takes social and environmental factors into account, but does not actively inform about their integration. These are conventional funds without special sustainability features.
  • Article 8 Funds: Funds with sustainable goals that take specific ESG criteria into account. These funds actively pursue ESG principles and provide information about them.
  • Article 9 Funds: Funds with sustainable goals and orientation that meet particularly ambitious ESG criteria. These funds take a clear and stringent, sustainable approach and present this transparently.

Overall, ESG analyses are not only an ethical but also a financial necessity for fund managers. Transparent portfolio managers who actively manage ESG risks and disclose their strategies can achieve stable returns over the long term and gain investors' trust.

ESG Green Impact: Level 2 standards for funds

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that aims to improve transparency and disclosure in the area of sustainable financial products. The regulation was introduced in two stages, Level 1 and Level 2, with Level 1 coming into force in March 2021 and Level 2 applying from January 1, 2023.

Level 1 — SFDR (March 2021): At level 1, the SFDR sets the basic requirements for the disclosure of information for financial products that are considered sustainable. In particular, the Regulation divides fund offerings into two categories: Article 8 and Article 9.

  • Article 8 Funds: These products are considered “light green” and should take into account certain sustainability aspects. Funds must provide clear information on how they integrate environmental, social and governance (ESG) factors into their investment process.
  • Article 9 Funds: These products are considered “dark green” and have an even stricter focus on sustainability. They must pursue specific and ambitious ESG goals and actively manage their impact on the environment and society.

Level 2 - SFDR (since January 1, 2023): The Level 2 Regulation, which has been in force since January 1, 2023, specifies the requirements of Level 1 and ensures that the disclosure of sustainable financial products is more detailed and standardized. Level 2 essentially expands transparency and reporting requirements for financial market participants and advisors.

Some of the key aspects of the Level 2 Regulation include:

  • Product specification: The Level 2 Regulation defines more clearly which funds can be classified as Article 8 or Article 9. This is to ensure that investors receive clear and comparable information.
  • Disclosure at product and company level: Financial market participants must provide comprehensive information on ESG aspects at product and company level. This includes information on ESG risks, significant adverse effects (MAI) of investments on sustainability factors and the contribution to sustainability.
  • Clarifications on significant adverse effects (MAI): The Level 2 Regulation specifies the requirements for the identification and disclosure of MAI. This concerns the negative effects of investments on sustainability factors such as environmental, social and governance.

In summary, the Level 2 Regulation helps to clarify the SFDR requirements and ensures that investors receive transparent and comparable information about the sustainability orientation of financial products. These measures are intended to enable investors to make informed decisions and to better understand sustainable investment strategies.

Integrate innovative ESG data and analytics via Bavest

Discover the power of high-quality ESG data with Bavest. Gain insights that enable informed decisions and drive sustainable growth. Talk to us and schedule a demo to find out more.


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