Sustainability data

Sustainability data: turning the tide allianzgi.com March 2023 1 A strong proprietary ESG data architecture is the cornerstone in understanding and aligning sustainable outcomes alongside financial returns. The challenge is to turn the mass of available sustainability data into insights that make an actionable difference. Recent years have witnessed significant growth and change around the topic of Key takeaways Thomas Roulland environmental, social and governance (ESG) – Integrating non-financial factors into Head of investing within the asset management investment decisions is increasingly Sustainability industry. Rising investor interest has combined Methodologies and mainstream, but the choice and style Analytics with evolving regulatory perspectives on of integration is still evolving. ESG integration and a forced rethink of – We think a dedicated ESG data sustainability investing in the wake of the strategy is critical for global asset pandemic and geopolitical shocks. But the managers to meet current and future industry has yet to address the best way to data, portfolio scoping and reporting handle the availability and application of needs. sustainability data. – Our dedicated Sustainability Without a dedicated and thoughtful approach Methodologies and Analytics team to ESG data management, we think asset strategically addresses the challenges managers risk being overwhelmed. At Allianz of data selection, aggregation and Global Investors, we have a team dedicated to implementation across public and guiding investors through the current deluge of private asset classes. sustainability data including scores, ratings, key – Our new Sustainability Insights performance indicators (KPIs) and controversies Engine – or SusIE – is a proprietary – now that effective ESG data management data tool to enhance understanding has become a strategic necessity. of ESG data. Everything everywhere all at once The growth in ESG disclosures in recent social responsibility (CSR) reporting through decades has been dramatic and now reached frameworks provided by industry bodies like a point where most of the world’s largest the Carbon Disclosure Project2, the Global companies report on sustainability (see Chart Reporting Initiative3 or the Sustainability 1). This shift has been driven primarily by two Accounting Standards Board.4 These factors: investor interest and regulation. organisations have promoted and provided Companies have been able to address guidance on the most material ESG topics for investor interest in sustainability or corporate public disclosure by corporations. Value. Shared.

Sustainability data: turning the tide Exhibit 1: Global sustainability reporting rates, 1993-2022 95% 93% 92% 93% 96% 96% 83% 79% 73% 75% 77% 71% 64% 64% 53% 45% 41% 35% 24% 18% 18% World’s 250 largest companies 12% Worldwide sample of the top 5800 companies 1993 1996 1999 2002 2005 2008 2011 2013 2015 2017 2020 2022 Source: KPMG International5 The second and perhaps more visible driver has been the recent wave of regulatory initiatives hitting the Exhibit 2: Growth of ESG ratings and rankings providers capital markets. At continental and national levels, regulators have presented varying requirements for the Number of ESG rating and ranking providers disclosure of sustainability information from corporates. 1000+* An example is the European Commission’s Principal Adverse Impact (PAI) framework, which requires specific indicators and methodologies to allow comparative 600+ analysis on potentially harmful investments.6 We anticipate this regulatory evolution to continue, especially outside Continental Europe. We expect the company coverage and extent of ESG 108 disclosures to expand significantly in the coming years. For example, climate reporting is expanding from 2010 2018 2022 Scope 1 and 2 emissions to a far wider scope of factors Source: Allianz Global Investors. * projected figure. 7 including Scope 3 , methane, carbon offsets and even governance. The expanded disclosures will help on quantifying topics like net zero, taxonomy alignment and Exhibit 3: Correlation of ESG ratings (%) sustainable investment share8. As more information is presented, all stakeholders will have to refine and adapt Sustain- Bloom- to ensure they are not paralysed by unhelpful analysis. MSCI S&P analytics CDP ISS berg MSCI 35.7 35.1 16.3 33.0 37.4 Too much of a good thing? S&P 35.7 64.5 35.0 13.9 74.4 Investors are already struggling with the current scale of Sustainalytics 35.1 64.5 29.3 21.7 58.4 sustainability data, which is not necessarily helped by the multiplication of sources and methodologies – we expect CDP 16.3 35.0 29.3 7.0 44.1 both to escalate exponentially in the coming years. The ISS 33.0 13.9 21.7 7.0 21.3 main challenge derives from the population of data Bloomberg 37.4 74.4 58.4 44.1 21.3 from ever-expanding and unregulated data providers that we estimate has exceeded a thousand now (see 10 Chart 2). This translates into different standards on Source: CFA Institute data capture, interpretation, methodology and delivery Meet SusIE – a dedicated sustainability data platform populating varying outputs for risk, sustainability, impact While it took the finance industry several decades to or controversy measures. come together on International Financial Reporting We are now able to measure our frustration at this Standards, we are trying to achieve the same for non- complexity and lack of uniformity. While the correlations financial standards in a fraction of the time. At AllianzGI, of outputs from the more mature financial credit ratings we believe sustainability requires a very specific and 9 providers are at least 94% , the ratings from the large dedicated data approach to selection and aggregation. ESG data providers exhibit lower and more disparate correlation – as highlighted by the CFA Institute in 2021 (see Chart 3). 2

Sustainability data: turning the tide Exhibit 4: Example ESG profile from the AllianzGI SusIE showing Company A in the insurance sector Image taken from SusIE dashboard showing ESG screening and controversy scores across several factors. As such, we put in place the Sustainability Methodologies – Generalist – these provide a full range offering of ESG and Analytics team in 2021 to develop a transparent, services, including raw data, peer analysis, ESG scores robust, and digital architecture. Now launched, this and qualitative analysis on ESG factors. architecture is known as SusIE or our Sustainability – Specialist – a highly granular, specific or niche offering of Insights Engine. data, opinions (eg, small cap, private markets) or themes SusIE will support the delivery of ESG, sustainability and (eg, biodiversity, social impact) impact data – with accompanying perspectives and – Technology – providers using alternative data capture opinions – to our investment professionals. It involves techniques like artificial intelligence or natural language a robust approach to scoping data sources, efficient processing to offer a new range of services and analytics. aggregation of this data, and the population of this These can include forward-looking measures, fuller data into clear and commercial front office-facing tools. coverage of investable universes, news flow screens and SusIE is designed to support the introduction of new truly independent raw data sets. data, removal of redundant data, and alignment to new Positioned for an ESG technology-powered future client product offerings. An example is the new net zero The one constant in any form of technology is change alignment toolkit, scheduled for launch later in 2023. and we are readying ourselves for this. We currently How we scope data for SusIE identify three likely important elements of any evolution of data and how they can be embedded in a robust and We value the cognitive diversity of the different resilient ESG data strategy: approaches in the market, and this helps us avoid 1. Evolving data capture away from current reliance on unintended implicit biases in model outputs. But purchased data. New technologies will allow for more discipline is needed in how we treat the different sources, alternative and independent sources, capturing more and we separate data providers into three broad perspectives. A likely future hybrid model will see quality 11 categories raw data complemented by external expert opinions. 3

Sustainability data: turning the tide 2. Powerful engines and efficient data processing to Nothing artificial about the intelligence outlook address the volume of data. This includes cleansing, In summary, the realm of ESG data is expanding swiftly matching, computing, transforming and distributing in volume and complexity. Investors will expect asset separate sources into consistent, standardised data sets. managers to guide them through the integration of ESG More granular E, S and G metrics will inform investment factors into investment decisions as well as the risk and decisions and asset allocation and meet client-reporting opportunity sets – at the same time as meeting challenging expectations. 3. Risk assessments will benefit from new techniques. The regulatory and reporting demands. We embrace the scraping of formal reporting suites is now mainstream, opportunity afforded by the scale and complexity of the but a fuller and more predictive understanding of data topic to demystify and guide our clients through material risks will be achieved through new technologies a likely eventful period of evolution in investment applied to an entity’s entire value chain. A fuller approaches. A strong proprietary ESG data architecture measure of idiosyncratic non-financial risks will allow for is the cornerstone in understanding and aligning non- investment diversification of these risks. financial outcomes alongside financial returns. Allianz Global Investors is a leading active asset manager with over 600 investment professionals in over 20 offices worldwide and managing EUR 506 billion in assets. We invest for the long term and seek to generate value for clients every step of the way. We do this by being active – in how we partner with clients and anticipate their changing needs, and build solutions based on capabilities across public and private markets. Our focus on protecting and enhancing our clients’ assets leads naturally to a commitment to sustainability to drive positive change. Our goal is to elevate the investment experience for clients, whatever their location or objectives. Active is: Allianz Global Investors Data as at 31 December 2022. Total assets under management are assets or securities portfolios, valued at current market value, for which Allianz Asset Management companies are responsible vis-á- vis clients for providing discretionary investment management decisions and portfolio management, either directly or via a sub-advisor. This excludes assets for which Allianz Asset Management companies are primarily responsible for administrative services only. Assets under management are managed on behalf of third parties as well as on behalf of the Allianz Group.

Sustainability data: turning the tide Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past 1. ESG = Environmental, Social and Governance. 2. Carbon Disclosure Project – www.cdp.net/en 3. Global Reporting Initiative – www.globalreporting.org 4. Sustainability Accounting Standard Board – www.sasb.org 5. Source: KPMG Survey of Sustainability Reporting 2022, KPMG International, September 2022. Worldwide sample of the top 5800 companies represent a worldwide sample of the top 100 companies by revenue in 58 countries or jurisdictions, 5800 companies in total. World’s 250 largest companies represent the world’s 250 largest companies by revenue based on the 2021 Fortune 500 ranking. 6. Another example is the EU Non-Financial Reporting Directive 2014/95/EU, as well as the proposed Corporate Sustainability Reporting Directive. 7. Scope 1,2,3 are different categories of greenhouse gas emissions, Scope 3 emissions cover those produced by customers using the company’s products https://www.weforum.org/agenda/2022/09/scope-emissions-climate-greenhouse-business/ 8. The share of a fund that is considered as sustainable according to the EU Sustainable Finance Disclosure Regulations definition. 9. Study on long-term debt ratings from Standard & Poor’s, Moody’s, and Fitch Ratings of 400 companies in 24 industries, Kevin Prall, “ESG 7. Ratings: Navigating Through the Haze,” blog posting at CFA Institute, 10 August 2021 10. Study on ESG ratings of 400 companies in 24 industries, Kevin Prall, “ESG Ratings: Navigating Through the Haze,” blog posting at CFA Institute, 10 August 2021 11. In the future, we envisage a fourth category of uncontracted or non-formal data sources, such as public sources, NGOs, general or specialist press articles or industry bodies, which could help inform or complement data sets or scores. performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. 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