Summary
In response to the growing demand for sustainable investment options, our client, a leading asset manager, embarked on a journey to enhance their ESG funds. This involved validating an inhouse rating model to score constituents based on performance relative to their peers. We collaborated to diligently validated by EVS, ensuring precise ESG data for informed investment decisions.
The Challenge
The firm’s portfolio managers that oversee ESG portfolios required data on corporates’ ESG leadership to ensure that their selection process was consistent with their investment strategies. It was critical to uncover ESG risks and opportunities and account for potential reputational risk or effect on ratings.
The firm developed an inhouse rating model to identify corporates that excel in environmental stewardship, strong governance, and positive social outcomes. The model uses publicly available data and third-party sources, and the final scores are used by portfolio managers to determine the fund constituents depending on the strategy of their portfolio. These ratings and selection criteria are provided to investors for transparency and therefore require a rigorous validation framework.
Our Solution
Evalueserve provided a full validation of the model by applying model risk management procedures. The validation encompassed a thorough technical assessment of the methodology used to score corporates through input data testing, benchmarking, and assumption testing. The team also performed an in-depth review of the processing components of the models and an evaluation of the model’s implementation by replication, sensitivity analysis and stress testing.
Business Impact
The collaboration resulted in a validated model that empowered portfolio managers to confidently shape ESG fund constituents aligned with their strategies. Evalueserve identified risks and biases that could indirectly impact the asset manager’s investment strategy since there is currently no scientific consensus or industry standard regarding ESG scoring methodologies.
Conclusion
Our partnership exemplifies proactive navigation of ESG investment complexities. The collaboration showcased the significance of tailored validation in a realm with evolving industry standards. By fortifying the ESG rating model, we elevated the accuracy of corporate ESG leadership identification, enabling the firm to offer ESG funds that resonate with investors seeking sustainable returns. This endeavor underscores the importance of robust methodologies and validation processes in the dynamic landscape of responsible investing.
