FactSet Research Systems Inc. (FDS) Earnings Call Transcript & Summary

[Audio Gap] I see a few people joining. Just to kind of give a brief introduction to everybody who's joining today. Thank you so much [indiscernible]. We are just waiting, so everybody has had a chance to come in before we formally kick things off. But I'll just kind of start things very casually with a bit of an introduction to me. I'm obviously representing Reuters Events here, and have been involved in putting this discussion together. So in terms of what we're looking to do with this content series, this webinar is actually an inaugural piece of ESG investment related content. So this is the first thing that we are doing to kind of sense check the themes that we've really been getting a little bit of demand for that audience. So we run webinars, we run white papers and then we kind of gear up towards our impacts in summer, which is happening in September called ESG Investment Europe, but that's been away off. So yes, it's our inaugural webinar of the year, and we're very, very excited to have such a brilliant panel together today to be discussing the topic at hand, which I will lead [indiscernible] to kind of give a little bit more background. So in terms of a tiny bit of housekeeping, I won't keep you for too long, but I do just have a few bits of what's to say to make the session run smoothly. Firstly, the webinar will be 1 hour long, actually everyone is all there, with a discussion among panelists, which is followed by a short Q&A. The whole session is being recorded, so you will have full access to it in your inbox in just 1 week. We would encourage you to share the discussion firm-wide with colleagues and friends who weren't able to join today. We have a really, really great lineup today and some brilliant talking points. So yes, I would love to kind of circulate these learnings as far and wide as possible. In terms of the little bit of add on I wanted to cover, we are ending the session with a short Q&A. You'll see at the bottom of your screen, there is a Q&A tab. I would encourage anybody to -- throughout the session, if anything pops into your mind, just put that in the Q&A box. I'll be watching that, and we'll be it passing it through to the moderator. So we can hopefully cover as many of your questions as possible towards the end. Just looking at our attendee numbers, we are seeing fairly, yes, steady increase of people. So I think it'd probably make sense for us to kick things off today. We are to get as much conversation in as possible. So yes, I just wanted to say, again, thanks so much, everybody, for tuning in today. Really, really excited about this discussion. And I am looking forward to passing it over to Charlotte Lush, who will be our moderator for today's session. Charlotte is a Senior Workforce Disclosure Initiative Manager at ShareAction, which means she's working to aid investors and companies in assessing how well they are serving their workforce. But to give more of an insight into the topic at hand, I will pass it over to Charlotte. So without further ado, you should lead things, Charlotte, to lead our session today.

Thank you so much, Sophie. Hi, everyone. Absolutely delighted to be with you today to talk about this year's absolutely fascinating topic. As Sophie mentioned, I work for the Workforce Disclosure Initiative, which is an investor-backed corporate reporting initiative that's supported by a coalition of 65 investors with more than $10.5 trillion in assets under management. And through our annual survey and engagement program, we increased the quantity and quality of information companies published on how they treat their workforce and provide investors with new insights into how companies are managing their most valuable asset. So perhaps unsurprisingly, I have a bit of a vested interest in high-quality sustainability information. And because of that, I am delighted to be moderating today's session on Mapping Out the Future of ESG Information Standardization, Optimizing Comparability Across Disparate Datasets. So we are joined by an absolutely fantastic panel today who I will briefly introduce, but I will let them say a little bit more about themselves when we get stuck into the questions. So we have with us today Magnus Billing, the CEO of Alecta; Michael Marks, Head of Investment Stewardship and Responsible Investing integration at Legal & General Investment Management; and Eli Reisman, Senior Director of Product Management, ESG Solutions at FactSet.

So to start with, it would be really, really great to hear all of your perspectives on the situation as it stands today. Eli, as FactSet is very much at the [ co-phase ] of addressing these disparate datasets, I will turn to you first. So research from Burton-Taylor showed that in 2020, asset managers were buying, on average, 4.4 ESG datasets. With the rise of regulation in the EU, this number is likely increase significantly over the past 2 years. When you are talking to clients, what pain points are they experiencing when trying to pull these different datasets together?

Thank you, Charlotte, and appreciate the question and yes, absolutely happy to provide our perspective. So there are so many different use cases for ESG data from regulatory to thematic ESG investing to impact investing. And we hear from numerous clients that to meet all of their ESG use cases, they need to buy ESG data from multiple vendors, which causes a number of headaches. For the purpose of time, I'll focus on two key workflows that we hear from clients just to illustrate the kinds of headaches that we're hearing about from clients on a regular basis. The first use case that we often hear from clients is the ingestion of different ESG datasets into a centralized database for enterprise use. When clients are going through this process, we know that the data massaging that happens on the back end can be really painful. The most prominent and obvious data issue is entity matching as most data providers don't always use the same security or entity identifiers, which can make pulling all of the different datasets together quite painful. Additionally, most data vendors only provide mapping -- sorry, provide equity mappings, which can make it quite difficult when trying to map data back to fixed income securities issued by the same corporate entities. We also hear from clients that having to manage the update schedules from all of these different data vendors can be really difficult as the updates don't always get provided in a uniform manner. And then lastly, we hear that mapping to all of the different ESG metrics that they're getting from different vendors into a centralized framework in order to create apples-to-apples analysis can be quite difficult and onerous for clients. The second workflow that we're often hearing about when it comes to ESG data management and where there's difficulties is when clients are looking to use their ESG data for specific workflows, like fundamental research or EU regulatory reporting. Figuring out how to bring all of the different ESG indicators into one place to make it easy to do research on a company or a portfolio or to build reporting templates on top of the datasets can be quite difficult for clients as well. So all of these -- the fact that there's different datasets coming from different vendors, all having to come into one place, trying to map all the equities together and then the actual visualization of that data, each of those pieces can cause headaches for clients.

Great. Thank you so much, Eli. Definitely seems like there's kind of challenges on almost every front. Michael, it would be really great to get your view as an asset manager here. So when it comes to the availability of ESG data, we have moved from a situation where previously, data provided tended to be more specialized and perhaps more niche. And now most, if not, all of them have been acquired by major organizations with much more capital that aim to provide more of a one-stop shop for investor's information needs. How do these changes in the data marketplace impact asset managers? And to what extent do you need to consider which data providers to use?

It's a fantastic question, Charlotte. And actually, everything Eli was saying is absolutely true as well, the complexities of pulling that data together from the different providers is really hard. In an ideal world, in some ways, you wouldn't need to go to multiple data providers. And the fact that all of these -- all of the vast majority of the data providers have been acquired by very well capitalized organizations who see the commercial benefits of this and investing in it. One would think this is heading towards a commoditized set of data where whether I get my carbon emissions data from provider A or provider B shouldn't really make any difference, except it does, and it makes a very significant difference. The way in which that data comes together is still varied in terms of collecting what is reported by companies and what is estimated, how much is research driven and how much is almost factual. There are some data points which are very straightforward, and even there, we still see differences. And then when you move to the more complex datasets, such as some of the carbon and climate data, we see some very different analytics from different providers. So that stat you gave at the beginning, 4 different -- average -- on average, it's 4-point-something different data providers, we probably have a dozen. And we use them for specific expertise and areas and then we still do some of our own analytics as well, where we believe we need to. And yet there are still areas where we are interested in doing work from an ESG perspective that no data exists yet. And there are areas where, as a marketplace, we know we need data. Probably almost every market participant knows we need to have better data, but we're still struggling to agree what's the standardization we're looking for. And a good example there is everything around biodiversity and the direction of travel of TNFD, which hopefully most people listening to this will know about, is to try and create some sets of standards of what we expect disclosure of information to be and yet we still have a long way to go. So these challenges, when one is trying to allocate capital, when one is engaging with companies to drive for improved market standards, when one is trying to assess who's a leader and who's a laggard on a particular issue, we are reliant on data. There are tens of thousands of companies across the capital structures both public and private, which is another area where different data providers are needed, just -- particularly in the private market space, that make this whole landscape really challenging. And going back to one of the things I said right upfront, one would have thought we're moving towards something that should be commoditized.

Thanks so much, Michael. Yes, I completely agree. There's definitely, I think, quite a strong mismatch between the strength of shared desire for comprehensive and comparable data and then what seems to be the strength of feeling for quite wildly contrasting views on what data that actually should be reported. And I think some of the slightly more heated responses to the ISSB and EU consultations on sustainability reporting can attest to that, definitely. And I think kind of on that note, it would be impossible to talk about sustainability data without considering the regulatory environment, which has seen a number of significant developments in recent years. Handing over to you, Magnus, there are various mandatory initiatives on sustainability reporting. So we've got the EU's Corporate Sustainability Reporting Directive, the SEC's disclosure rules and as I mentioned, sustainability reporting standards being developed by the ISSB. How do you think these international developments will impact progress towards data uniformity?

Thank you very much, Charlotte, for the question and for having me here today. It's a pleasure to be here on this very, very important topic and very timely topic, I would say. I think just a couple of words on the organization that I represent, Alecta. We're managing around -- we're an asset owner, the pension fund. We manage around USD 110 billion. We have -- when it comes to allocation, around 50% allocated towards equities, 30% towards the fixed income and the remaining 20% to alternatives. And we have an investment model, which is very much based on fundamental analysis, and we do the analysis in-house. So we have -- we strongly believe in understanding what we invest into. And then we have an extremely long-term investment horizon given the liability side of our balance sheet, obviously. So for us, ESG has, for the last few years and for many other asset owners, been a factor and a component that we need to consider in the investment model. And we have taken the view that, that is fully aligned with this initiative to ensure as much return as possible over time to our beneficiaries. And we think that we could add value by being the party or partner to the transition that is required in order to reach the net zero. So with that background, the data component of ESG has obviously been critical to us. And I think as many asset owners, we've been working with the ESG data for a number of years. And I think we always feel there has been a number of challenges with this ESG data, and Eli and Michael alluded to those to some extent. And we talked then about comparability, accessibility, reliability, but also a shift towards more forward-looking data compared to what we have been working with in the past to some extent, particularly in this area. And I think that's maybe one of the most challenging components of the ESG data, how do we get to this forward-looking transition data that we need in order to assess and integrate into the investment process, the relevant ESG aspects into it. So with those challenges, from the start based on a quarter of regulatory initiatives in this area, I think we need some regulatory support in order to address these challenges. And I think it started with the TCFD recommendations in 2017 in a meaningful way on the climate side. And I think the progress from 2017 has been good with that -- those recommendations. At least when I look in the -- among our corporates in our portfolio. A lot of the corporates have embraced that, and that we try to implement that into the business model and that has generated a high quality data to us as an investor mostly. But following that, the implementation of the TFSD (sic) [ TFCD ] recommendation, I think we all have experienced a tsunami of regulation in the last few years. And I wonder sometimes whether what's the added value to those regulations coming within that tsunami. Again, I would like to stress that I'm, as a starting point, positive and supportive of the regulatory need to play a key role in this development that we see. And the European Union, as you mentioned, has been a driver in this area with the taxonomy, with the -- all the abbreviations and mainly the EFRAG standards on financial reporting that we all have been working quite hard within 2022. But I think one needs to stop a little bit and consider what's the fragmentation that this is causing. What's the cost benefit analysis behind these -- all these regulations and how can it be used? And I also think there's a focus topic to discuss here. If you look at the standard that came out from EFRAG just last year, I think the width and the breadth of all the initiatives and the depth of it is overwhelming for a lot of corporates out there. And we should remember that, by and large, the European community is dependent upon the small and midsized advertisers to create value and jobs for our society and what's the burden on them and how much value to lead as an investment. But also from the investor point of view, looking at an organization like Alecta, it's quite cumbersome to [ embrace ] all these reporting requirements. And given the importance of being [ additional organization ] in order to secure a good return in the long term, one needs to be a little bit careful in calibrating that [ action ]. So I think there is a balance to be strike here, and it's also a global aspect to consider. I think it would be detrimental to European Union if we had a fragmentation on a global basis, and we see some signs of that. We see taxonomies popping up in different regions of the world. We -- I talked about these standards, which I think is not fully aligned the ISSB roots in this area. And I would urge the regulator to strive even further towards organization across the globe on this area, that would be beneficial for the investor community. But again, I think we need a regulator, so we need a standardization, and I think they have a key role to play, but carefully calibrated.

Charlotte, may I jump in and add something there because I think what Magnus was just saying is so true. And when we're talking to the corporates that we invest in, they're equally struggling with the range of different standards and expectations, the different disclosure requirements, the questionnaires to complete from different NGOs which are becoming more complicated and more detailed, with some determining that they don't want to complete those questionnaires, which is actually to the detriment of the marketplace. And when I say the marketplace, I do mean all participants, if we don't have that sort of transparency. So trying to reach for the -- that -- it's not interoperability, but that standardization and expectation of key pieces of information. And clearly, there will be some aspects where what we, as an investment manager want will be perhaps different from what Magnus wants and other investment managers, which are things we can discuss individually with companies. But the key pieces of information and why I probably used the word commoditization, it shouldn't be that we have to go to -- or have differences across providers on those key pieces of information because it should just be that was their level of standard that we would expect to see, and the corporates who have to provide that reporting, understand that as well and they're not trying to reach different standards or debating with different providers why they think one number is right and another one is wrong.

Also, if I may, Charlotte, just a reflection -- I fully with Michael, yes. One could also consider the standards -- the purpose of the standardization. I think there's clearly an objective with the standardization related to avoiding greenwashing and consumer protection in this area. And that's extremely important for all of us, the trust in the market space and so forth. And then you could think about standardization for the purposes of supporting asset owners, asset managers and other market participants. There, I mean -- there's always room for individual assessment of different data and different data sources. And that should, I think, be a natural component of the function of the marketplace. I mean, for us, claiming that we have an investment model based on fundamental analysis, our definition means that there's no reason to wait for standardization and harmonization to act upon the ESG data when we make consideration on that, right? So I think it's important to keep those 2 features in mind when assessing the appropriateness of the regulatory development.

Thanks so much, Magnus and Michael. I mean, I think, I completely agree with both of you. I think you made some really good points. And I think that sometimes regulation can be treated as a panacea because there's such a -- it can feel like this proliferation of kind of voluntary mismatched standards, but regulation, unfortunately, is not immune from some of the same issues when it comes to the standard development that voluntary data initiatives are exposed to as well. Just because it's mandated doesn't mean it's necessarily going to be the most relevant or most helpful information for investors. So that kind of sends us back into a cycle of their needing to return back to voluntary framework. So definitely about trying to find a balance. And I think your point, Michael, about having those kind of like core consistent data points that you can then build on top of is, yes, a really important one. Moving on to think now about how these issues are sort of playing out in practice. And I think obviously, with such a fantastic panel, we would be remiss not to hear the wealth of more practical insights you will have into how disparate data sets manifest for your organizations and how you are tackling this. So handing over to you, Eli. Investors are using sustainability information in really diverse ways. We've just heard about some of them already. And financial market participants in the EU are facing unprecedented need for different data sets together for their own external reporting under the SFTR. However, investors may also need data for their own internal analysis and decision-making with, for example, many asset managers now developing their own unique ESG scores. So given these really wide-reaching uses of ESG information, how is FactSet helping to make these processes easier for clients?

Thanks, Charlotte. And yes, these are two very meaty topics: SFTR, regulatory reporting, and also the building of unique ESG scores. So I'm going to take them one at a time and address them separately. So starting with SFTR, I feel like that's a hot button issue so we can start there. We regularly hear from clients that they are having difficulties with SFTR because it's -- and this is something that we heard from Michael, and Magnus is probably feeling this as well, but finding one data provider to meet all of the different SFTR requirements, whether they be the corporate SFTR data or the real estate data or the sovereign data that they have to collect as well as the EU alignment data can be difficult. So they're left oftentimes pulling together multiple different datasets that they need to then report out on and get into one location. From FactSet's perspective, one of the great strengths as a company for FactSet is our portfolio analytics capabilities. FactSet systems are currently used for managing over 20 million different portfolios, which account for about $31 trillion in assets under management. So these are established systems. And as part of these capabilities, FactSet has already established processes for creating portfolio reports that can be batched and published into documents for as many portfolios as a client needs. These capabilities are being used today for other regulatory use cases outside of ESG and other workflows. And so they're sort of tried and true methods. Additionally, another strength of FactSet's is that when it comes to data and ESG data in particular, FactSet's always been an open platform. We currently have one of the largest third-party ESG data libraries on the market, which gives clients a wide choice of different datasets that they can use to help solve their regulatory reporting needs. And in addition, FactSet offers its own internal SFTR PAI dataset as well in addition to the third-party library that we have. Clients are able to bring their own proprietary data as well. We often hear, especially in the regulatory space, clients wanting to have sort of their own proprietary dataset be a part of the reporting and that can be loaded into the FactSet workstation as well. And then once all of these third-party options are selected or loaded, FactSet data can be accessed by a number of the different applications that we have, such as the portfolio reporting, making it simple for clients to build a singular report from multiple different ESG sources. Additionally, once -- clients also have the ability to use an Annex 1 template that FactSet has built to help clients map all of these different indicators into the report and build their own SFTR report using a format -- the format prescribed by the EU. So after the client has completed their customized indicator mapping and built the report and added all their custom logic, FactSet can then generate the SFTR report for any number of portfolios being held in the system or roll that data up for our client -- at the client level in order to report out the entity level information for SFTR. So our systems, again, tried and true, bring in lots of data into one place, allow clients to pick and choose, create their own custom logic and then batch and scale this for as many portfolios as they need. So hopefully, that gives a sense of how we're helping clients on the SFTR front. When it comes to addressing the unique ESG score or what we oftentimes refer to as the composite scoring workflow -- that is a workflow that we commonly see with our clients and where they're running into the managing of multiple ESG datasets. Many clients come to FactSet for helping this area for three different reasons. The first reason why clients are interested in FactSet when it comes to unique scoring is FactSet delivers a differentiated ESG dataset with the true value data, which leverages artificial intelligence and parses through millions of unstructured documents from third-party sources to create an analysis score. And this data is oftentimes blended with other traditional ESG datasets to provide a holistic view of a company's performance. So I think it was -- I believe Michael mentioned that he's working with 12 different datasets. Having a unique differentiated view that can help potentially identify blind spots around ESG is very helpful for clients when blending it together with other datasets out in the market. The second reason clients come to us around the unique scoring -- creating a unique score is, as mentioned previously, FactSet already offers a wide variety of third-party ESG data that clients can use to blend together to create their own unique score. So being able to come to one place and grab different ESG datasets and blend them together is quite useful for clients. And then thirdly, FactSet provides industry-leading tools to help map all of the different ESG content together to create a connected set of -- or connected ESG datasets. So there tends to be sort of two primary workflows that we hear about from clients who want to generate these unique scores. The first, a number of clients really want to just ingest all of the ESG content via feeds or API so that they can build their own unique scores in-house. For these clients, FactSet is able to provide standardized data feeds and APIs from -- with those third-party -- that third-party library of ESG content as well as our own proprietary content, where all of the feeds and APIs are standard. So it's much easier to work with the data when you're getting the same kind of content from one provider. Additionally, FactSet also is differentiated in that we have a data management system product that makes it really easy for clients to map all of the different content together using their choice entity identifier. The second workflow that we hear about from clients is a number of clients want to leverage an internal system, something like FactSet's Workstation software to generate the unique ESG score so that multiple individuals on the team are able to access the score through a shared user interface. For these use cases, clients can work with FactSet's client solutions team to customize and map the different ESG datasets together that they want in order to generate a unique score within our system that can then be proliferated to everyone on the team. So hopefully, that gives a sense of some of the different tools and functionality that FactSet is working to provide to clients, both to help on the SFTR front as well as that unique scoring -- the unique ESG Score front as well.

Thanks so much, Eli. I'm incredibly impressed with the level of aggregation in the amount of things that you can do with data. Yes, very jealous of your capabilities. It sounds absolutely fab. So now turning to you, Magnus. I know Alecta have been working to stress test your portfolios based on a number of climate scenarios. What data challenges have you faced within this work?

Well, thank you for the question. We have been doing a stress test of our portfolio -- entire portfolio for the last 3 years on an annual basis, as you said based on a number of climate scenarios. And we have, in that work used, I think, three data providers with a focus climate. So basically, just -- so we're trying to source the same type of data in relation to the 100 companies that we have in our portfolio and the number of credits that we have. So fairly narrow scope of the data we've been looking for. But one challenge in that sourcing has been the diversity of the input that we get from on the data. And we talked about Scope 1, 2 and 3 data. So that has been one challenge. And then we have also -- maybe I should say a few words on the method. So what we try to do is based on the scenarios towards 1.5 degree, 2 degrees. We have tried to put a carbon price on the emissions that we are responsible in a sense by holding a share in corporate and discount that the carbon price -- assess cargo price to any net present value. And obviously, the outcome shows that the market value in the marketplace is higher than what our calculations show given the fact that the corporates are not today considering fully the necessary carbon price for being aligned with the net zero environment. So the different outputs from the data providers has been one challenge. Another challenge is obviously the assessment of what's the relevant carbon price. When you talk about Scope 1, Scope 2, Scope 3 data, the quality of Scope -- accessibility and the quality of Scope 3 data has been very poor. It has improved during these 3 years, but it's still just such a -- in such a state that we think that we need to discount maybe around 50% of the data that we get on Scope 3. But I think despite these shortcomings that I'm describing, we have found during this 3 years that it has created a high value for us as an investor. It has shown, to some extent, the vulnerabilities of our holdings and has provided impetus to discussion internally, what kind of actions that we need to take in order to meet our objectives of net zero on the entire portfolio. And lastly, it has also created a very dynamic discussion with our corporates as part of our engagement with them. Of course, what we basically have done is to bring this result, this outcome of the stress test to concerned corporates and describe to them what kind of calculations we've done, the assumptions. And we have asked. The first question is do you agree with our assumptions? Do you agree with our calculations? And if they do, we obviously move on to the discussion of what's the action plan to ensure that, first of all, we get commitment on the net zeros that we have alignment with the goals. And secondly, we get the disclosure of the emissions that the corporates are causing. And thirdly, what is -- how do you plan to adjust your business model in order to ensure that you can create shareholder value in a net zero environment? Is this a cost -- additional cost that you're going to follow through to your customers? Can you cut the cost in your operations in order to mitigate the additional costs from carbon price that we expect? What's the plan? Show us that. And that has been extremely valuable for us as an investor. And I think it has been also a value for the corporates that we hold shares into to think about this topic and hopefully up their games and in particular, align their goals with our goals.

Thanks so much, Magnus. I think you raised a really good point on the ability of investors, the power that investor's use of data has to shape corporate behavior. And I think the -- particularly the issue you raised around kind of problems with quality for Scope 3 data, I think is something that we see across the spectrum of ESG issues. So I think similarly, data on incidence of modern slavery in the supply chain is notoriously inconsistent and patchy as well. And I think it does raise a real challenge, which I think has been sort of a consistent theme throughout this discussion, which is, is it better to have some data that's flawed or to have no data at all, which I think I don't have an answer, and I don't know if any of you do. I guess kind of a big question. Michael, I...

But we'd need to start somewhere -- right.