Diversity, employee benefits, and greenhouse gas (GHG) emissions.
These are just some of the key environmental, social and governance (ESG) considerations that are rapidly becoming essential to investment analysis and portfolio selection as institutions and financial professionals embrace sustainable investing.
It’s a trend that has only grown this year with investors pumping record sums into ESG funds during the early months of the pandemic. According to Morningstar, assets under management in what it calls sustainable funds globally hit a record high of $1.3 trillion as of the end of September, up 19 percent from June. Their relative out-performance has been attributed to heightened appetite among investors for exposure to sustainable businesses as companies face greater scrutiny over how they are managing their response to the pandemic, which has brought the social element of ESG to the forefront in particular.
But what about the data underpinning this important trend?
Until recently, investors had relied on ESG ratings produced by third party providers as the main input for their ESG decision making. Now, investors want to go further and look behind the ratings to the underlying company data to make their own assessments. That’s understandable because different providers may consider different ESG factors and assign different weightings to them.
Yet not all data is created equal, and ESG data faces its own unique set of challenges. Companies use their judgement in determining what information to disclose, in what format, and which metrics to use. This means that reported information can be inconsistent and insufficiently standardized to enable effective comparison across companies and can be subject to errors.
If ESG data is to be used effectively to support investment decision-making, it must be comprehensive, granular, timely, and properly normalized. ICE ESG Reference Data aims to provide this in three ways.
First, with raw data that offers detailed ESG attributes and indicators about public companies, in a standardized format. This helps investors gain transparency into the impact of key ESG issues, uncover opportunities and manage risk. The underlying data model was developed in collaboration with Bank of America (BofA) Global Research, which leverages ICE ESG Reference Data to enhance its global equity and credit analysis. Data is sourced from company reports, and supplemented with data from publicly available third-party sources.
For maximum granularity the ICE data includes GHG Scope 1, Scope 2 (location- and market-based), Scope 3, and companies’ progress on meeting carbon reduction targets. Granular data is also available for other categories, including workforce (broken down by gender, race and location) and company board changes, when they happen.
Data quality is managed through the combined use of technology and a dedicated team of data analysts. Every data attribute is carefully analyzed by ESG specialists and validated with technology. To ensure further data integrity, ICE has an open and transparent feedback process that enables clients and companies to raise inquiries about the data, which helps ICE continuously quality check.
Data points are updated daily as new information becomes available, and ICE’s technology is constantly monitoring for new information.
Second, ICE also provides the BofA ESGMeterTM, a quantitative assessment of a company’s relative ESG performance, created using ICE ESG Reference Data. This complements the underlying data set, providing users with another reference point for their analysis.
Third, we provide risk data for ESG analysis. This is provided through a partnership with RepRisk, an ESG data science company that combines artificial intelligence and human capabilities to develop comprehensive ESG risk data sets. This risk data focuses on ESG risk factors that may impact a firm’s financial performance such as exposure to child labor, corruption, and fraud and is sourced entirely from independent sources, acting as a valuable counter-weight to company-reported information.
Data is the lifeblood of markets. Being able to access granular data sets allows users to triangulate information to arrive at meaningful insights for their investment strategies. Another tool that allows this is ICE Climate Risk, which helps investors assess the climate risk exposure of municipal borrowers, using climate risk analytics provided by risQ, a Boston-based start-up, and combining this information with municipal security-level reference data from ICE.
All of these tools can add value where it matters, instead of investors having to spend time on data cleaning or validation. That’s not only important now, but will be increasingly important in the future given the anticipated growth of ESG-related investment activity: BofA Merrill Lynch estimates that over the next two decades $20 trillion of asset growth will occur in ESG funds – equivalent to the size of the S&P 500 today*.
The shift to incorporating ESG metrics is underway and locking in access to comprehensive and quality data now, will help provide greater transparency for investors, allowing more informed, sustainable decisions.
* 10 reasons to care about ESG investing, BofA Merrill Lynch, 2020
Lynn Martin is President, Fixed Income & Data Services at ICE