How can technology help the front office better engage with clients?

By Matt Bale, Head of Product, Buy-side Solutions, Moody’s Analytics

It is hard to ignore the current trends driving asset owners to focus on sustainable investment, which in turn requires the asset management community to adapt and evolve to introduce ESG friendly investment solutions. But how do asset managers better understand and analyse portfolios from an ESG perspective and effectively report on these new factors to clients?  It is a challenge in a world where the technology underpinning the asset management community is often outdated and lacks the flexibility to incorporate ESG factors that more modern solutions can provide.

The needs of an asset manager sound simple. Getting an instant view on the decomposition of their ESG investment decisions has to be the central goal. As a case in point, for a portfolio manager who incorporates E, S, and G factors when constructing a portfolio, the contribution of each domain could be reported in turn. Say, for example, 60bps came from the impact of weighting the portfolio based on environmental decisions, 20bps from social, and 20bps on governance. This same methodology could be used to compare investment decisions based on the carbon footprint of a portfolio, its energy transition score, as well as other criteria. And surely their clients (the asset owners) expect this level of basic reporting as an absolute minimum.

Done well, this type of analysis is more than a tick box exercise – it can be genuinely insightful when applied to portfolios that are taking positions in ESG investments. Without a detailed understanding of the sources of return for an active ESG portfolio, a portfolio manager will struggle to quantify and report to their clients how their approach has been adding value over a sustained period of time. In a world of increasing investor scrutiny, portfolio managers really have no choice but to be able to articulate the impact of their investment decisions on performance.

Technology will have a huge role to play in upgrading asset managers capabilities to support climate and ESG investment strategies.  With fees coming under increasing pressure, it is tempting to view technology through a cost cutting lens. However, those managers that use technology more effectively externally, to better engage clients, particularly in the area of sustainable investment, will be better placed to maintain and grow assets under management. The more asset managers can focus on what clients want and need, the more effective they are going to become in developing and selling solutions into their client base.