Does the Buy-Side Need Another Book of Record?

In the investment management industry, the acronyms ABOR, IBOR and PBOR are used to designate accounting, investment and performance book of records, respectively.

The need for these terms arose because of segregated front- and back-office systems as well as systems often siloed by asset class: fixed income, equity and so on. This complicated consolidated views across asset classes and funds and made it more difficult to have accurate intraday position overviews to guide investment decisions. Combine this with the growth in volume and diversity of data sets that can be used in investment management, and the strain on legacy systems is high.

So What Does It All Really Mean?

The Accounting Book of Record (“ABOR”) is a centralized set of accounts to support different investment functions and measurements.  It is the basis for daily NAV and fund admin activities and external reporting – to clients and regulators. The more commonly used term Investment Book of Record (“IBOR”) goes a step further in terms of granularity and real-time views of performance and risk data. An investment book of record looks at market prices, intraday positions and performance at the position level. The need for IBOR arose because of a need for better informed decision-making, compliance and operational efficiency – with a focus on near-real time portfolio information as opposed to a typically batch oriented ABOR. Given an often siloed application landscape and diversity of data sources, putting an IBOR in place that services the front, middle and back-office is a nontrivial task though.  Lastly, the Performance Book of Record (“PBOR”) includes more investment information, performance information and risk factors enabling more transparency and drill-down into investments and their performance drivers.

How Does It All Work?

When it comes to ESG investing, the asset management industry faces a similar aggregation challenge and in addition must add new data sets and reporting requirements to the inputs for ABOR, IBOR and PBOR.

ESG data comes from different suppliers and includes corporate disclosures, expert opinion, different third-party rating providers as well as intraday news or sentiment data. Despite the range of sources, there are significant gaps in the record as well as a range of external reporting frameworks. Establishing linkage and hierarchy across corporates and financial instruments is needed as ESG data is typically disclosed at the corporate level. There is often a lack of historical data for indexing/benchmarking and ESG data needs to be integrated with asset allocation, portfolio management, client and regulatory reporting. The use cases range from simple exclusion lists to proprietary analytics to create custom investment factors.  These data management challenges come on top of the problem of disjointed systems between front, middle and back office, frequently siloed across fund families or asset classes.

Envisioning Future Possibilities

Given the diversity of data sources and applications, what is needed is an SBOR or “sustainability book of record” which aggregates ESG data with internal positions, trades and pricing data. SBOR provides stakeholders across departments an accurate, intraday view of the ESG characteristics and exposures of the overall portfolio. An ability to have comprehensive, portfolio-wide end-of-day ESG information is a prerequisite to client and regulatory reporting. The ability to easily access aggregated data will enable asset managers to respond quickly and appropriately to market changes and new reporting challenges. Whereas corporates may have a quarterly reporting cycle, rating and third party export opinions can change far more frequently and ESG news and sentiment data comes in intraday. An accurate, intraday view of ESG, with any gaps highlighted or transparently proxied can be the basis for asset allocation, portfolio management and regulatory reporting. Institutional clients would likely also require frequent reporting on (changing) ESG characteristics of their assets. The SBOR could be an add-on to PBOR if we interpret ESG factors as just additional investment factors but given the regulatory scrutiny, backlash against greenwashing and investor appetite for socially responsible investing, it looks as if it deserves its own label.

Given the range of different ESG data sources and gaps in ESG data disclosures, there are material data availability, comparability and quality challenges. Data management capabilities to aggregate, cross-reference, verify and, where needed, derive ESG data is indispensable to coming to accurate portfolio level ESG metrics for portfolio management, investment operations, client reporting and regulatory reporting.