A brief look at ESG data providers
A brief look at ESG data providers
ESG (Environmental, Social, Governance) investing is on the rise, and it shows no signs of slowing down. As investors become increasingly focused on sustainability issues, they are demanding greater transparency from companies in the form of concrete data.
This data, together with traditional research, is being used by investors and hedge funds to discover long-term investment opportunities with lower financial risk. Last year, FinScience reported more than 70% of global investors applied an ESG lens to over a quarter of their portfolios, compared to 48% in 2017.
Companies require accurate ESG data that can be utilized for metrics, ratings, and optional or mandatory ESG reporting. However, access to reliable, real-time materiality data is the only way for investors to increase alpha.
As a result, a slew of ESG data providers have emerged, offering a variety of products and services aimed at assisting investors and businesses in expanding their ESG programs.
Understanding the big data revolution's impact on ESG
Data technology and our ability to analyze large amounts of data is growing at exponential rates. Artificial intelligence and machine learning, computational strengthening, and increased global connectivity are driving what many are calling the "big data revolution". Technology is enabling companies to collect detailed information from their consumers, suppliers, partners, and competitors.
ESG data includes any indicators that shed light into the sustainability context of an asset, facility, company or region, whether historic, current or expected. ESG data is collected under three primary umbrellas:
- Environmental data should capture environmental information such as annual carbon emissions and energy consumption, water usage, and waste and pollution output
- Social data focuses on statistics related to workforce diversity, gender equity and human rights
- Governance data tracks company input regarding corruption, labor practices and gender composition of the board of directors
While all ESG data is important, much of the world is focused heavily on environmental sustainability and reporting as climate change becomes a global risk that affects every country on the planet and disrupts economies. Big data can generate useful insights that support environmental sustainability and help companies improve business operations throughout the value chain.
Tracking the full supply chain of large corporations and keeping companies accountable to their goals, especially when balancing multiple objectives such as reducing waste and increasing profitability, requires the use of big data analysis. As technology improves, companies are turning to data providers to track and integrate qualitative ESG data into their operations.
ESG data providers can play an important role in the investment process by gathering and assessing information about companies’ ESG practices and offering equity screens, portfolio construction and analysis, relative value analysis, competitive benchmarking, and risk analysis.
Three types of data providers
1. Market data providers
To characterize market trends, data providers collect comprehensive information on commodities, fixed income, foreign currency, and equities. They also offer analytical tools to assist investors in determining trends and investment performance. Bloomberg, FTSE, MSCI, and Thomson Reuters are examples of market data providers.
These companies also provide data solutions based on ESG topics like climate change using proprietary technology platforms. Market data providers can be used by businesses to assess fossil fuel reserves, carbon emissions, and risk and exposure. These companies also provide specialized data services that allow businesses to aggregate data by theme such as gender statistics, employee rules, diversity and inclusion, community engagement, and even religious convictions.
2. ESG exclusive data providers
With the advent of ESG, a rising market for ESG-exclusive data suppliers has emerged. In comparison to market suppliers, these firms concentrate only on ESG research, evaluations, and analysis. Arabesque, Covalence, CSRHub, Ethos, Inrate, Sustainalytics, and Goby are just a few companies that offer comprehensive ESG data services. Each of these firms has its own technique of assessing ESG aspects, grading methodology, and risk analysis tools.
3. Specialized data providers
Specialized data providers focus on one or more aspects of ESG, but not all three. CDP, for example, provides a wealth of information and statistics on firm performance and risks related to climate change and water, carbon footprints, and fossil fuel and renewable energy exposure. In key global equity indices, this type of data can be utilized to spot opportunities and analyze risk.
The data quality issue
While there is a plethora of data and data providers, the various types of data, inaccuracy of information, and numerous analysis and benchmarking methods of this data continue to be a challenge. Given the abundance of reporting platforms, standards, and regulations, many organizations find it difficult to meet investor and stakeholder demands for high-quality, reliable ESG data.
Furthermore, financial reporting and ESG reporting are rarely connected, making it difficult for ESG data providers to clearly link financial performance results to ESG practices. Data providers seek to address these difficulties by supplementing a company's reporting with external sources and surveys that track the link between ESG and financial success.
To avoid unfair comparisons, companies and investors must also account for geographical and industry disparities, as well as skewed data that does not fit well within normal distributions. Because there is no standardized data, companies within the same sector can report different data points, certain ESG information is only partially measured and accounted for, and the data companies share can change from year to year.
As a result, evaluating the quantity and quality of ESG data that a data provider provides, as well as learning how they get their data and what methods they use to synthesize the data, is one of the most significant considerations when choosing a data provider.
The role of data standards & reporting frameworks
Certain reporting standards are becoming more commonly adopted as the need for data requirements develops, and businesses should take note. As countries begin to implement guidelines that improve data credibility and eliminate discrepancies, standards and regulations will undoubtedly play a crucial role in the future of ESG investment.
In 2020, for example, the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework became mandatory for signatories to the UN Principles of Responsible Investing (UNPRI) and is expected to become required in the United Kingdom, New Zealand, and possibly the U.S. in the next few years.
The Sustainability Accounting Standards Board (SASB) has also made positive progress in creating reporting standards and recently released 77 industry-specific accounting standards to help investors understand how material sustainability issues can impact a company’s financial performance.
While reporting to ESG frameworks like SASB, the Global Reporting Initiative (GRI), or International Integrated Reporting Framework (IIRC) greatly improves data quality, much of the data is voluntary and prone to selective disclosures. While great strides need to be made with data consistency, the benefits still far outweigh the issues.
The benefits of data tracking
Data tracking and analysis has many benefits for companies, investors, and regulators. Companies can use ESG data to showcase business performance, demonstrate improvements, track goals and commitments, all of which build brand sustainability and trust with investors and consumers.
Consistent data, along with strong ESG management and reporting, assures investors that a company is positioned to thrive and guarantees sustainability in the face of social, economic, and environmental upheaval.
ESG data can also provide big benefits for regulators who can integrate statistics into government policies to ensure better environmental regulation. In fact, governments have access to sensor technology and real-time reporting data that can be used, for example, to monitor emissions of large facilities and help design regulatory frameworks.
Ultimately, using data to monitor and track the impact companies have on the natural world provides an innovative way to ensure businesses embrace sustainability efforts while creating change, cutting costs, and boosting long-term profitability.
Today’s big data allows us to detect sea level change, identify resource usage, track global temperature change, and create future projections. Investors, companies, and governments all must commit to using big data analyses and enacting sustainability agendas to ensure humanity can be sustained safely and successfully on our planet.
Taking control of your ESG data
Companies can take control of their ESG data narrative by proactively tracking data and providing voluntary disclosures. To do this, companies can work on setting a reasonable, customized baseline of standardized ESG metrics with industry peers to achieve comparability.
A high-quality process should include data providers that can track current, accurate data and deliver data in a clear, timely manner. For sustainable investing to grow, all parties, including investors, companies, and stakeholders, must work together to improve the accessible, reliable, standardized ESG data.
Corporate sustainability disclosures need to be anchored in sound governance, management, and performance systems and communicated with transparency and clarity. This process ensures trustworthy, quality data.
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.