In 2015, two former legal counsels at Swedish asset manager East Capital saw a business opportunity in smoothening the due diligence process taking place between asset managers and fund distributors.
The idea was to gather all relevant documents, company references points and other information needed to perform due diligence in one platform.
This process laid the foundation of GRC Watch, a Stockholm-based regulation tech company. Now five years later, it has 350 members such as asset managers, distributors and other fund industry entities in its network.
According to GRC Watch Founder and CEO Linda Hellström, the fund industry benefits from every percentage that’s standardized and automated in the due diligence process
"In the past, you often had to write a lot of emails and chase the newest updated fund documents when performing due diligence," Hellström says to AMWatch.
Before founding GRC Watch, Hellström and GRC Watch Partner and Co-founder Susanna von Langsdorff negotiated more than 200 distribution agreements on behalf of East Capital. In some cases, it could take up to 12 months to on-board the emerging and frontier market specialist's products to new distributors.
"GRC Watch enables both smaller and larger asset managers to minimize resources spent on administration, because due diligence is to this day still a lot of chasing documents. You need to be compliant and make sure to always present the newest information to investors" she says.
Over the past 12 months, investment managers have increasingly highlighted ESG due diligence as becoming "a true headache", notably due to a lack of standardization. To overcome this issue, an ESG questionnaire is set to be added the GRC Watch's platform in December.
"Asset managers can then share the profile as a response to ESG due diligence by institutional investors instead of filling out unique questionnaires to one company at a time. We hope that it will help them speed-up their work with RFPs (requests for proposals, -ed.), but also improve the analysis of information in relation to such due diligence," Hellström highlights.
At Swedish consultancy and wealth manager Söderberg and Partners, one fund provider challenge relating to ESG due diligence revolves around the fact that answers can vary depending on who is providing the response at a given point in time.
"Answers coming from people in a sales department tend to be written in a more communicative way and the responses are sometimes less focused on details related to the way that they work with ESG in practice," Lingyi Lu, Head of Sustainability, tells AMWatch in a written reply.
Another challenge is the combination of free text answers and multiple-choice questions because one company may write a several page long essay while another firm writes a short comment in a free text field.
"Maybe neither of the answers provide the information that you really need. For instance, questionnaires usually include questions about the choice of data vendors and whether the asset manager also has its own resources for data analytics. These types of questions could be improved in a way where it would be easier to understand how they use the data in practice," Lu says.
Hellström says that the forthcoming ESG questionnaire is being developed in collaboration with the market participants who have provided feedback. This will help determine the most important aspects.
The first questionnaire is drafted in collaboration with former East Capital head of sustainability Louise Hedberg, who now works as an advisor for investment managers and institutional investors on sustainable investing practices.
"We have received a lot of feedback from both asset managers and institutional investors. We use our expertise in compliance to pick the best ones and frame the questions in order to make them streamlined," Hellström says and continues:
"We're still awaiting feedback from some companies so it's not too late to provide feedback. We constantly work with the content of our questionnaires so it’s something that will evolve over time. We will aim to adapt to leading questionnaires in the market and together with our community we aim to raise the level of standardization."