In recent years, awareness of environmental, social and governance (ESG) factors in the financial sector has increased significantly. At the same time, the concept of impact investing, in which financial investments are intended to achieve positive social and environmental effects, is also gaining in importance. Asset managers are playing an increasingly important role in integrating ESG and impact investing criteria into their investment strategies. ESG reports play a crucial role in this, as they not only assess the sustainability performance of funds and portfolios, but also serve as tools to provide investors with transparent insights.

In this article, we'll take a closer look at why ESG and impact investing reports are essential for asset managers and how they can help drive long-term success. We also address the importance of data and show specific examples using the Bavest ESG climate reports, which, for example, make biodiversity or climate impact measurable and show.

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The relevance of ESG and impact investing for asset managers

The S&P 500 ESG index surpassed the S&P 500 benchmark by almost 3% last year, which is all the more remarkable as beating the benchmark is not even one of the stated goals of the ESG index.

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1. Risk management: ESG and impact investing reports enable asset managers to better identify and assess non-financial risks. By analyzing environmental, social and governance factors as well as the positive social and ecological effects, potential risks such as environmental pollution, social unrest or governance issues can be identified and mitigated at an early stage.
2. Performance improvement: Research has shown that companies with strong ESG practices and positive social and environmental impacts do better in the long term. Asset managers can use ESG and impact investing reports to identify companies that offer sustainable and stable returns over the long term.
3. Customer expectations: Investors, particularly institutional investors and millennials, are increasingly placing emphasis on sustainable and impact-oriented investments. ESG and impact investing reports enable asset managers to better understand their clients' needs and respond accordingly.

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The challenges of using ESG and impact investing reports

1. Data quality and availability: One of the biggest challenges when integrating ESG and impact investing reports is the quality and availability of data. The information is often incomplete or unreliable, making analysis difficult. There is often a lack of data for small caps or mid-caps and makes it difficult for institutional investors in particular, who focus on companies with smaller market capitalizations.
2. Standardization: There are no uniform standards for preparing ESG and impact investing reports, which can lead to inconsistencies and difficulties with comparability. Asset managers must therefore deal with various frameworks and methodologies.
3. Complexity: Analyzing ESG and impact investing reports requires a deep understanding of environmental, social and governance issues, as well as the impact on a company's financial performance and the positive social and environmental impact of its activities. This often requires specialized expertise and resources.

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The SEC's new rules on climate reporting

The US Securities and Exchange Commission (SEC) has adopted new regulations (March 2024, at the time of publication of this article) that require the largest publicly traded companies in the US to disclose their significant scope 1 and 2 greenhouse gas emissions and other climate-related financial information. While the rules do not require companies to disclose emissions from their value chain (Scope 3), they must disclose climate-related risks that may have significant effects in the short or long term. These regulations can help close a global disclosure gap: Only 45% of U.S.-listed companies currently disclose their Scope 1 and Scope 2 issues, compared to 73% of publicly traded companies in other developed markets.

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The future of ESG reports for asset managers

Despite the challenges, the importance of ESG and impact investing reports for asset managers is expected to continue to grow. Regulators worldwide are calling for increased disclosure of ESG and impact investing information, which could improve transparency and comparability. In addition, technologies such as artificial intelligence and machine learning are developing, which can make it easier to analyze ESG and climate data and provide new insights.

However, to take full advantage of ESG reports, asset managers must continue to expand their capabilities and resources to analyze and interpret this data. This requires investments in training, technology, and partnerships with ESG and climate data providers.

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AI-based ESG & climate reports from Bavest

At Bavest, we have developed an innovative reporting engine that, based on our specially collected data and evaluations, offers deep insights into the impact of sustainability aspects of portfolios and funds.

Our reporting engine frees you up so that you can concentrate fully on your day-to-day business, while we produce high-quality reports for your wealth management. With our focus on our AI-based ESG reporting and the discovery of climate data, we offer institutional clients, private investors and your sales team the opportunity to gain and use well-founded insights. Our range of services includes traditional performance metrics and evaluations as well as the integration of alternative data, which enable a thorough analysis of your investments in terms of sustainability and ethics.

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Which metrics enable portfolio managers to make the climate impact measurable? Bavest analyzes and evaluates the following metrics, among others:

1) CO2 emissions Scope 1, Scope 2 & Scope 3

2) Carbon Footprint Outlier

3) Water Usage

4) 1.5 Degree Target Scenario

5) Temperature Analysis

6) Total Waste of Companies

7) Biodiversity Impact

8) Management Diversity

9) Benchmarking with other funds and indices with a sustainability focus

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Are you interested? Then book a conversation with us and we'll show you what an ESG and climate report looks like and how it can help you integrate more AI and technology into your asset management.

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Conclusion

Overall, ESG reports offer asset managers the opportunity not only to maximize financial returns but also to achieve positive social and environmental impacts. By integrating impact factors into their investment decisions, asset managers can help create a more sustainable and impact-oriented future, while ensuring the long-term value of their portfolios. Asset managers, banks and funds can also show existing clients, but also potential investors, how sustainable their investment strategies really are.

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