Over the past decade, the volume of ESG data available to investors has soared. Regulatory scrutiny, twinned with investor and stakeholder appetite, has driven demand. At the same time, big data technological innovations have powered access to company disclosures, modelled scenarios and public statistics that supplement ESG ratings and scores. Among these advances, artificial intelligence, automation, machine learning and geospatial imagery are producing increasingly granular data. But is all this information useful?
“We’re drowning in data now and somehow struggling to make sense of it,” says Alexandra Mihailescu Cichon, head of sales and marketing at data provider RepRisk. “There are a lot of asset managers at the beginning of their [ESG data] trajectory and for them it can be an overwhelming time to start.”
Daniel Klier, CEO at sustainability data and technology provider ESG Book, echoes the point. “There’s a gap in some of the relevant forward-looking metrics that help investors allocate capital, and a large amount of information available to institutions that aren’t experts in the [ESG] field, and that can be overwhelming.”
The issue with data availability is not quantity, but quality. Concerns persist around data verifiability, consistency and comparability. At the same time, there are still significant gaps in ESG data, as well as a lack of transparency about the assumptions underlying scores, models and scenarios behind the data.
“There’s too much information that isn’t useful or robust,” says Arleta Majoch, chief operating officer at Impact Cubed, an ESG data provider. “But on the other hand, we still have datasets that we know are relevant and that we can’t get access to, like supply chain information.”
Mind the gap
Even at the larger end of the market, where reporting is more forthcoming, particularly around greenhouse gas emissions from companies in emission-intensive sectors, emissions reporting is by no means universal. Of all the large- and mid-cap listed companies globally (around 4,000 entities), 42 percent do not report basic Scope 1 and 2 carbon emissions, notes David Harris, head of sustainable finance strategic initiatives and partnerships at the London Stock Exchange Group.
“We’re in the painful process of standardising data while regulations are being introduced”
Alexandra Mihailescu Cichon
Outside of Europe and across emerging markets, data is even scarcer. Of the approximately 1,000 companies in FTSE China A Series, only 10 percent report Scope 1 and 2 data. The figure is the same for US-listed companies included in the Russell 2000 Index. “At its most basic, that’s a huge gap in investor portfolios,” Harris says.
Drilling down, more detailed figures on revenues generated by sustainable products and services are even harder to access. “Of the approximately 3,000 companies which we think have got some level of green revenues, only about a third of them provide a good breakdown,” says Harris.
Among businesses that do report on their sustainability impacts, discrepancies in disclosures and suspicions of greenwashing mean that, for investors, “the trust issue is large”, says Vanessa Barnett, senior director of ESG content strategy at data provider FactSet. “It comes down to regulation or lack thereof, which begets lack of standardisation, which begets lack of availability of really verifiable data coming from companies.”
The use of models and proxies to bridge these significant gaps in company and asset level data is a key source of scepticism. “We need to shine much more of a spotlight on estimation models. There needs to be real transparency about what is estimated data, what is not, and how it has been estimated,” says Harris. “Depending on the assumptions that are made with the model, some are better in some situations, some in others.”
A dummy portfolio test conducted by the Institutional Investors Group on Climate Change that compared net-zero alignment scores on around 60 companies revealed a significant variation in results reported by vendors. “One provider might say a company is two-degree-aligned, while another provider might say it’s three-degree-aligned,” says Danielle Boyd, the IIGCC’s head of climate strategy implementation. “And that obviously creates problems because there’s not a lot of consistency for investors.”
Navigating data confusion
Asset managers formulating a net-zero strategy must pick their way through a field of products and data types, ranging from company-level greenhouse gas disclosures to more complex indicators combining multiple products and specific calculation methodologies. “It becomes a really complex environment for them to navigate,” says Boyd. To help investors assess which vendor meets their data needs, the IIGCC has compiled a catalogue of net-zero data vendors.
“We’re moving from a world of simplistic scores to a much more refined data landscape”
In providing data, “the first thing that we should be clear about is what is the purpose of this data set”, says Cichon. “What are we trying to measure? And then: how are we actually measuring it? That’s part of the challenge. Without answering those questions clearly for investors, it’s very difficult for them to properly embed the data into their processes.”
Meanwhile, investor demand for new data sets is rising. Managers are increasingly looking for data on topics such as biodiversity impacts and water scarcity. Managers are also seeking a broader set of social metrics – an area where accessing data has been historically difficult and significant gaps remain. To fill them, investors are reliant on substituted data.
For instance, to measure diversity and inclusion at a company that does not report these numbers, gender balance is often deployed as a proxy. “But it’s a poor proxy,” says Majoch. “There are different types of diversity and some of those are not visible unless you go through a person’s medical records.”
Calls for more corporate disclosure and the standardisation of metrics and approaches are growing louder. But the number of industry initiatives and frameworks launched to improve reporting to boost consistency, comparability and transparency can also be confusing to navigate. “We’re in the painful process of standardising data while regulations are being introduced,” notes Cichon.
And the regulations themselves can be a source of ambiguity. The EU Sustainable Finance Disclosure Regulation has had an undeniable impact on ESG data requirements globally. But lack of clarity around definitions, notably what qualifies as a sustainable asset, has prompted a flood of funds to downgrade from Article 9 to Article 8.
Some of the language around the regulation’s Principal Adverse Impacts (PAI) reporting obligations is also unhelpfully vague – despite clarifications offered by the SFDR Delegated Regulation that came into force at the beginning of the year. “If you look at biodiversity, [the PAI states] ‘operations in or near diversity hotspots’. How near?” Majoch asks.
The right direction?
While some market participants are still hesitant to say if the finance sector is moving in the right direction given the significant limitations around ESG data, others are more positive. All agree that the industry is in a period of huge transformation, amid an evolving regulatory landscape, growing investor sophistication around their data needs and technological innovation.
In net-zero disclosure, a best practice industry standard is emerging thanks to the Glasgow Financial Alliance for Net Zero, which has built on the work of the Taskforce on Climate-related Financial Disclosures, says Boyd. GFANZ launched in April 2021 and now includes more than 550 financial firms as members. “We would really encourage data vendors to orientate, or at least map their own methodologies against those industry standards,” she says.
More broadly, the implementation of the EU’s Corporate Sustainability Reporting Directive, which will cover around 50,000 large corporates and small and medium-sized listed businesses, is widely viewed as a step forward. Some companies captured by the regulation will be obligated to begin reporting sustainability impacts as early as 2024.
Meanwhile, the efforts of the recently formed International Sustainability Standards Board to establish a global baseline of sustainability disclosures are generating considerable anticipation. LSEG’s Harris believes that “at the moment there does seem to be quite a desire from a lot of the policymakers and regulators to work together, and the ISSB is providing a forum that enables that”.
“I’m excited from a disclosure perspective,” says Barnett. “We’re still years out, but the foundations are being laid.”
In a fragmented vendor landscape, featuring a variety of niche products, vendors are also collaborating and consolidating particular datasets. Barnett notes that, for vendors, “the future is supplying as much industry benchmark data [as possible] and giving tools to our customers with which they can generate their own methodologies”.
“We’re moving from a world of simplistic scores to a much more refined data landscape,” says ESG Book’s Klier. “Institutions realise a single score isn’t enough to explain how a company is doing on climate, on human rights, on diversity and inclusion, and governance.”
AXA Investment Managers used to rely on an ESG score based on aggregated data supplied by a few providers. “It was quite complex,” says Thomas Coudert, head of fixed income sustainability at AXA Investment Managers. Each provider used a different methodology and “at the end of the day, information was lost, and the final score did not correlate with any input”.
“There’s too much information that isn’t useful or robust”
Today, with consistency in methodology as a priority, AXA has simplified its approach, relying on individual vendors with global coverage to supply data on specific topics, such as carbon emissions or biodiversity. AXA’s internal ESG data team then assess the data. As a portfolio manager, “you need a lot of data points, which you don’t use in the same manner. This is why it’s important to have different third-party providers,” Coudert says. “There is huge quantity of data available. But we also see a huge evolution in methodology.”
For data users, “it’s about having the right level of information and getting access to the very granular, raw, question-level data, right down to specific impacts, so that our clients can use that information to make better decisions”, says Steven Bullock, global head of research and methodology at S&P Global Sustainable1.
To get there, models have an important role to play, Bullock says, noting that all businesses are familiar with some level of scenario planning. The key is providing investors with appropriate guidance about the interpretation of scenarios and being transparent regarding the science, assumptions and methodologies applied, he says.
ESG data “is a dynamic market driven by engagement between data providers and users”, says Thomas Kuh, head of ESG strategy at Morningstar Indexes. “Asset managers are asking much more sophisticated questions. They have much more internal expertise.”
While that conversation continues, technological innovation is accelerating access to new data sources. “The data we will see going forward will be enhanced by the growing availability of information generally, new technology and a specialised focus on sustainability issues,” says Kuh.
Looking to the future, advances in areas such as geospatial imagery that can pinpoint location-specific carbon emissions or biodiversity impacts, and remote sensor technology that can measure, for example, water use, have transformative potential. By sidestepping gaps in corporate disclosures, intelligence gathered by objective third-party technology offers the benefits of verifiability, accuracy and immediacy. It answers the complaint that disclosed information is typically out of date by the time it is reported.
“At some point disclosures will become more much simplified or even obsolete, because we’ll have a lot of data with which we can verify what’s actually happening on the ground,” says Cichon. And for investors, having immediate access to high-quality comparable data across multiple topics that meets a specific use-case is the goal.