The ESG trend has been a boon to asset managers—an opportunity to market active funds to a socially and environmentally conscious generation of millennials, coming of age just at a time when passive investing was eating active managers’ lunch. At the same time, a constellation of vendors and solutions providers has risen to service this market with data, scores, and solutions.

But those managers interested in engaging with a transition to a green economy—as opposed to just presenting clients with a portfolio that reduces funding for carbon emitters—must still invest in extractive industries, as that is where they can make the most difference. And green transitions come with their own risks, whether economic, reputational, regulatory, or social.

Rongrong Huo, executive director and head of investment institute at UK- and South Africa-based active manager Ninety One with £135 billion ($163 billion) in assets under management, says that while a decarbonized portfolio looks good on client reports, it doesn’t necessarily reflect a firm’s true commitment to building a sustainable world.

“Your reports can make your investment or fund portfolio look beautiful, but it might be counterproductive to what we’re trying to do outside the firm,” she says.

If investment firms believe in investing in the green transition, they somewhat counterintuitively must invest in companies that still have high emissions. It’s the engagement of the active management community that will encourage corporates to embrace a shift to greener practices and technologies, Huo says. However, this does mean that—at least for some years while the corporates get going on their transition in earnest—a manager’s portfolio won’t look good, from a cosmetic point of view, on reports or in calculations.

So active managers need to understand the impact of their portfolios not just in the present, but also in the future, to understand the opportunities and risks of corporates as they decarbonize. The problem is the availability of data and metrics—or rather, the lack thereof. While datasets and scores from vendors are useful, these managers say they need more bespoke tools and prefer to build tools in-house.

Asset managers undergoing ESG integrations have therefore come up with their own metrics, scorecards, and forward-looking methodologies expressly intended to track green transitions. UBS quants, for instance, developed a decarbonization framework for valuing the green transition of heavy industry—understanding how corporates could achieve strong financial performance in the future while shifting to more sustainable ways of going about their business.

Another example is East Capital with €5.2 billion ($5.3 billion) in assets under management, an active manager specializing in emerging and frontier markets. East Capital has used a proprietary scorecard within its global emerging markets fund since 2016. The scorecard also includes a separate module that maps risks against the United Nations’ 17 Sustainable Development Goals (SDGs).

East Capital partner and chief sustainability officer Karine Hirn says she believes that her firm’s own tools are more accurate than anything it could buy from external providers, partly due to vendors’ spottier coverage of emerging markets. The firm’s knowledge of the markets under its focus and its engagement with local corporates give it an edge, she says.

In terms of measuring carbon data, East Capital has developed six metrics, including carbon intensity, reported emissions, and net-zero targets. The manager also engages in direct discussions with companies about their carbon footprint, as well as via the Carbon Disclosure Project, a non-profit that runs a global environmental impact disclosure standard, and the Science-Based Targets initiative, which helps companies to set impact targets.

These are important metrics and engagements for the firm, Hirn says, but carbon footprint is a relatively easy impact to calculate. It’s harder to understand risk in more nebulous, subjective areas, especially the “S” part of ESG. “These are quantifiable data, less tricky to evaluate, compute and assess than social risks,” she says.

The firm, however, has experienced some limitations in its own data to measure forward-looking environmental impact. The global emerging markets fund is aligned with the SDGs, but it has found that its scorecard had limitations when it came to measuring the true SDG impact of a corporate across its value chain.

In response, East Capital developed an outcome tool, incorporating Sustainability Accounting Standards Board (SASB) metrics. The tool measures not only how a corporate’s activities, including its value chain, has impacted the SDGs over the last one to three years, but also how these activities are expected to do so in the future. Based on this assessment, the corporate gets a rating that feeds into other ratings for a more complete picture of its impact on the SDGs.

These kinds of proprietary tools bring more value to East Capital’s clients than if they bought them from a third party, Hirn says. “We are believers that whatever solution and methods people use, they are only good if they provide real insights and are not just a tick-the-box exercise that one includes in a client report or a mandatory report,” she says.

But, Hirn adds, there is a place for third-party tools to fill in gaps that asset managers may have in their own data and scores.

One of the foremost providers of ESG metrics is MSCI. The vendor recently launched a tool, called Total Portfolio Footprinting, to help financial institutions measure carbon emissions across their lending and investment portfolios, allowing them to understand the extent and impact of the greenhouse gas emissions they are financing.

The vendor previously provided emissions calculations for listed equities and corporate debt, but the new tool expands that coverage to municipal bonds, private assets, and securitized products, among others. It is the latest addition to MSCI’s ESG suite, which includes MSCI’s Climate Lab, Net-Zero Tracker, and Implied Temperature Rise.

Hirn says it makes sense for MSCI to expand the scope of its footprinting tool, as regulators, particularly in the EU, take steps to prevent greenwashing. The European Commission’s Sustainable Finance Disclosure Regulation (SFDR) demands that firms disclose Principal Adverse Impact (PAI) indicators: at least 14 mandatory indicators for public investments that detail companies’ impact on, for example, greenhouse gas and carbon emissions, water purity, and gender equity.

“PAI statements will have to be done for all funds in scope of SFDR,” Hirn says. “Investors are also increasingly requesting data across portfolios.”

MSCI’s Marion de Marcillac, executive director for ESG, climate change, and sustainable impact solutions, says emissions data is key to forward-looking assessments of carbon impact. Some analysts might want, for example, to measure transition risks—economic or reputational risks following a shift to greener technologies or business methods. If that analyst, as part of their research, wanted to assess how a corporate’s emissions targets aligned with global temperature benchmarks, for instance, they could look at temperature alignment.

“You need the emission data first, and then you can model [temperature alignment],” she says.

Investment firms need to know what their starting point is, and track progress and trends over time, identifying the “hotspots” within their portfolio that are driving the financed emissions, and assessing them against a benchmark.

For example, De Marcillac says the three sectors that contribute the most to a firm’s financed emissions are energy, materials, and utilities. “Having that understanding will allow investors, banks, and insurers to identify where it is they have the most leverage in their actions, and where it is they have the most risk. The goal is for investors to better manage climate risk and to be able to report on that internally and externally, with their stakeholders, especially if they’ve taken a commitment to do so,” she adds.

A major challenge for asset managers wanting to understand emissions, however, has been a lack of reliable data. Large, established corporates in the West tend to have relatively reliable carbon emissions reporting, but smaller companies might not have the capability or the will to report. There are few requirements for reporting standards.

And there are no disclosure requirements on private assets, De Marcillac adds.

“It’s just a lot trickier to find information. A number of our clients are using our data for those standard segments or asset classes, and some of them have been starting to develop their own estimation model, or using proxies,” when they could not obtain harder-to-find data, she says.

MSCI started building its footprinting tool in April, leveraging capabilities from its climate risk and analytics teams. Some of its emissions data is available pre-calculated for over 4 million securities, which MSCI has in files it can share with clients. The vendor can also calculate financed emissions on demand, if clients provide their desired companies via an API.

The API connection provides a quick connection to clients, De Marcillac says. “With on-demand, we need to be able to ingest the data from our clients, calculate the financed emissions, and spit it back in a few minutes at worst.”

The output of the emissions calculation across carbon scopes 1, 2, and 3 is as recommended by the Partnership for Carbon Accounting Financials. The tool also provides a quality score to indicate the level of confidence the firm has in the data, ranging from one—denoting reported, audited data—to five, which means the data is just an estimate.

The next step in building the tool, which MSCI will execute before year-end, is to integrate it into its other solutions so it is visible in Climate Lab, its risk monitoring application, for example.

“The client would be able to see the on-demand calculation that we’ve done, and then they would have the dashboards where they can monitor it over time,” she says. “For instance, they could see a snapshot of their financed emissions every quarter—what has changed, what has been driving the change.”