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The Ultimate Guide to ESG Data 2023
ESG Data is driving sustainable investment and shaping a cleaner corporate world. We’ll talk you through how the data is being used on the ground, what insights ESG data can provide, and why ESG data matters in 2022.
- Global ESG data market predicted to reach $5bn by 2025
- Annual spend on ESG data is up 20%
- Demand for ESG data growing: “The majority of investors believe that companies with ESG-aligned practices can be better long term investments, but continue to need better reporting and data to evaluate holdings on those criteria,” - says Ted Eliopoulos, Vice Chairman at Morgan Stanley Investment Management.
Why ESG Data matters
In the aftermath of COP26 and as the climate crisis develops, more emphasis is being placed on companies’ ESG (environmental, social and governance) performance than ever before. At the end of 2021, the International Sustainability Standards Board was formed to make ESG reporting more transparent. Similarly, there’s increased pressure for companies to divest and for corporate boards to develop stronger social responsibility strategies. Environmental and geopolitical matters are now business issues. We’ve seen that financial markets worldwide are affected when revelations about a company’s poor ESG scores come to light. For this reason, an unsustainable investment is an unwise one.
ESG data enables investors, banks and fund managers to identify pre-tradel ESG risks. This way, they can make ethical, valuable and sustainable investment decisions. More widely, external ESG data is creating transparency in financial markets as more investors are making ethical trading their number one priority. Let’s have a look at some examples where ESG data is decisive in creating successful financial and business strategies:
- Sustainable investing - The primary use case for ESG data is sustainable investing. Under this bracket, there’s also ‘thematic investing’ and ‘impact investing’, where certain ESG metrics become deal-breakers for investment decisions. According to Morgan Stanley, 72% of thematic and impact put climate change at the top of their priority list, with 57% saying water solutions drives their decisions, and 44% saying gender diversity. Using ESG data from an external provider ensures investors have the clearest picture on investment prospects so they can make successful - and sustainable - strategies.
- Risk assessment - ESG data manages a range of financial risks for companies, from climate risk to reputational risk and consumer backlash. Stock prices for Nestlé plummeted when revelations about their palm oil misuse came to light. The value of ESG data is its thorough insight into companies’ practices, so that financiers can predict and manage risk ahead of trade.
- Compliance - For investors as well as businesses themselves, compliance with global and local ESG regulations is crucial. For example, the newly-instated EU Green Bond Standard aims to tackle greenwashing by putting companies through strict environmental regulatory procedures. ESG data enables businesses to streamline their own regulatory practices so that their portfolios are in line with regulations, most importantly the Sustainable Finance Disclosure Regulation (SFDR). This kind of intelligence also allows investors to flag up prospect portfolios which aren’t complying.
In short, ESG data is helping drive successful, sustainable strategies across the financial and business ecosystem. In Chapter Two, let’s dive deeper into the specific data attributes of an ESG dataset, and look at what new insights ESG data providers can offer in 2022.
What new insights you can get from an ESG Dataset in 2022
To unpack the insights on offer in an ESG dataset, it makes sense to break it down into the ‘E’, ‘S’, and the ‘G’.
Environmental data on a company measures the impact of its operations on the climate and ecosystem. It can include attributes like:
- Greenhouse gas emissions
- Resource depletion
Social criteria measure a company’s practices in relation to its labor force, as well as the wider community. Social attributes include:
- Working conditions and health & safety
- Gender diversity
- Racial diversity
- Community outreach
- Responses to conflict and humanitarian crises
- Material/product risks
Governance attributes all relate to how the company is run, what its C-suite looks like, and how it complies with the relevant regulations:
- Fair tax strategy
- Executive pay
- Bribery and corruption
- Employee pay and reward distribution
- Board diversity
These attributes all come to bear on a company’s overall ESG score. ESG ratings fluctuate based on whether the company is hitting its internal and external sustainability targets.
As the demand for granular ESG data grows, external ESG data providers are offering specialized analytics into either the ‘E’, ‘S’, or the ‘G’. A survey by ESG Clarity found that over half of ESG data providers (53%) offer general data, covering the E, S and G sides, while 33% of providers specialize in just one aspect only. These providers offer niche insights into areas like company connections to the defense industry. In the wake of global conflict, these kinds of data points are crucial for shareholders - individuals, banks, hedge funds, and governments - as they develop sustainable and ethical investment strategies.
The ‘E’ and ‘G’ of ESG criteria will continue to be important. However, in 2022, there’s expected to be a bigger focus on the ‘S’ than we’ve seen before. The pandemic demanded employers be more flexible with their working hours, in-office and work from home provisions, and employee engagement. As employee satisfaction, equality, and inclusion become more influential when it comes to the company’s share price, it’s important that all stakeholders get transparent data about an organization’s social practices.
So those are just a handful of the data attributes comprising an external ESG database. The nature, range and granularity of the data points you need will affect the price of the data, which brings us onto Chapter Three: how much does ESG Data cost?
How much does ESG data cost?
By the end of 2020, there was an estimated $1.3 trillion in sustainable funds worldwide. Sustainable investing is a lucrative market. Companies are devoting more of their budgets into investing in ESG data. In light of this, external ESG datasets can carry huge monetary value because they provide the analytics for successful portfolio selection.
All the same, the cost of ESG datasets depends entirely on the attributes, recency, and range of the data on offer. There’s also variation between pricing models for data products. One-off dataset purchases are typically less expensive to download than a custom ESG data subscription or consultancy service, tailored to the client’s needs.
Also, the ESG data provider landscape is evolving, as more startups are offering ESG data at competitive prices. These startup data providers now occupy a third of the ESG data market. They’re making quality ESG data available to a wider client base at more accessible prices than the big finance names.
In Chapter Four, we’ll look at who some of these big names are, as well as some new data providers who are shaking up the ESG data market.
Building ESG Data provider partnerships - who’s in the market?
The household names: General data providers
Many of the established financial market data providers offer ESG data as part of their catalog. These are providers like FACTSET, leading provider of financial market data on listed companies. Financial market data providers incorporate ESG metrics into their market sentiment analysis. There’s also providers like SafeGraph, whose primary data category is location intelligence, but who have ESG data products to purchase, too.
The specialists: ESG-specific data providers
Other data companies offer ESG data as their primary product and service, like DataSpark. These providers have data sourcing and analytics teams devoted to collecting and cleaning ESG signals. Platforms like GaiaLens’ ESG Analytics separate ESG scores from other company data points, so are tailored to sustainable investing.
ESG-specific data providers can also offer detailed analytics into the ESG performance of NGOs, non-listed companies, and into markets which aren’t covered in traditional datasets. This harder-to-find information sets the ESG data provider apart, and is the niche many startup data companies are beginning to cater to.
The companies themselves: Data monetizers
Companies worldwide are having to produce more stringent, standardized ESG reports on their internal operations and global impact. As the demand for ESG insights grows, many companies are taking the opportunity to monetize their proprietary data. By making their historical ESG data available for purchase on data marketplaces, companies create more transparency about their own sustainability record, and open up a new stream of revenue using their existing data assets.
The open sources: Public data providers
For general ESG information, financial news outlets like S&P Global and Bloomberg are a good place to start. They alert investors on the latest ESG news, such as when new climate legislation is passed, or a company sees its ESG score drop, and publish reports outlining market predictions. Open source and public data can’t offer the deep-dives into a company’s ESG profile you’d get from an external data provider, but they’re a strong source of real-time market intelligence.
Where do these providers get their data from? Let’s have a look at the nitty gritty of ESG data sources and collection.
The nitty gritty of ESG data sources & collection
To collect data relating to the ‘E’, providers often rely on hardware which tracks changes in the physical environment. For example, satellites which detect changes on the earth’s land and marine surface, or instruments monitoring atmospheric conditions. These can provide insights into geospatial risks made worse by climate change. Investors are increasingly having to factor adverse climate into their risk assessments, as storms contributed to a loss of $1 billion in business in the US alone in 2021.
To compile datasets on reputational risk, data providers crawl news and social media sites to detect public sentiment. This way, providers can detect negative discussion about a company in relation to their sustainability or ethics, and calculate risk assessment metrics based on real-time sentiment.
Likewise, web crawlers are able to build the best picture of a company’s status quo ESG performance. They can collect unstructured data points from public sources, such as corporate diversity and wage reports, which the provider then structures into a digestible, ready-to-use format.
As we’ve seen, providers use crawlers and machine learning models to extract raw data from publicly available sources, like corporate and governmental reports. These reports offer analytics into a company’s sustainable development goals (SDGs), carbon emissions, employee wages, and historical ESG scores. The benefit of using an external ESG data provider for this information is that they can tap into these sources at scale, so that clients can skip the research time and access thousands of company records on-demand.
Investing in ESG data is a risk prevention move. In keeping with this, it’s cruicial to make sure that you mitigate risks when actually buying the data. The best way to do this is to check its relibilably by getting a sample, and doing your data due diligence. We’ll show you how in Chapter Six.
Doing your due diligence - how to check ESG Data reliability
The more granular the data is, the more precise you can make your investment strategies. For example, datasets covering a company’s ‘diversity’ should be broken down into separate metrics, including gender, race and sexual orientation.
Precision especially matters when it comes to climate and environment data. Over-generalized data can lead to a company’s carbon emission being completely misrepresented, for example. Verify which methodology the provider uses to collect these quantitative data points, and measure the sample against a secondary source.
Real-time data is crucial for on-the-ground sustainable investment strategies. A lag in delivery can prove disastrous if it means an ESG risk is only identified after the damage is done. Trialing any data subscription service is vital to ensuring that you’re getting the data which represents the current financial picture.
Roundup - what’s next for ESG data?
Sustainable finance leaders predict that ESG-conscious investing ‘will evolve quickly into a more nuanced and complex environment where data will be specific to the use case required’. So we can expect that demand for ESG data will not only increase, but become increasingly specialized. We’ll keep you posted with all the developments in the ESG data ecosystem: what kind of new data is out there, what it’s being used for, and how it’s bringing sustainability and responsibility to the fore of the financial and corporate worlds.
To predict the long-term performance and growth of a company investors have begun to consider its environmental, social, and governmental strategies. The performance of a company is becoming increasingly dependent on its non-financial operations. Consequently, the demand for ESG data has increased among data providers, potential investors, and companies, and more people are looking for ESG data sourcing solutions.
To make an informed decision about the correct data it is important to gain an insight into what ESG data is, how it can be sourced, and how it can be used. Our Ultimate Guide to ESG Data will provide you with all the information you need so that you are empowered to purchase and make use of the right ESG data for you.
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What does ESG stand for?
ESG criteria are the environmental criteria, social criteria, and governance criteria used to assess overall company performance. The ESG criteria look beyond the financial success of a company and instead assess how sustainably and ethically a business is being run. Analysis of the non-financial operations of a company can determine whether an organization will be successful in the long-term.
How is the Environmental criteria within ESG measured?
Within ESG, the environmental criteria are measured against how well a company upholds regulations that protect the environment. Environmental criteria consider whether a particular company poses any potential threat to the environment and whether the company in question is equipped in a way that allows it to deal with any potential environmental risks.
How is the Social criteria within ESG measured?
Within ESG, the social criteria are based on how a company treats its employees, customers, vendors, and the attention it pays to the local and wider communities it is based in.
How is the Governance criteria within ESG measured?
Within ESG, governance criteria are measured according to the distribution of decision-making processes across company stakeholders. The governance criteria relate to company accounting methods, tax audits, its shareholder rights, the salaries of its top-level executives, as well as the controls it places on these internal policies. Government regulations set the foundation for these criteria, but it is ESG providers who evaluate a company’s adherence to the regulations set by a particular government.
Overall, how is ESG measured and why is this so important?
ESG data providers measure a company against their checklist to calculate an overall ESG rating for the company. The ESG score of a company and its adherence to environmental, social, and governmental criteria is important as it assesses the potential growth of a company and the company’s ability to do business in the long-run. The ESG score can inform investors, allowing them to decide whether they wish to put money into a particular company.
Why are ESG scores important for companies?
The ESG score of a company is often integral to its ability to continue operating and attractiveness to investors.
How can a good ESG score positively impact a company?
A high ESG score means companies are in a good position to anticipate the potential risks within business operations, with access to ESG datasets allowing companies to recognize the operational changes which could be made in order to support the long-term sustainability of a company.
How can a poor ESG rating negatively impact a company?
A poor ESG company rating can spell disaster for even the most financially successful of organizations. The impact of a poor score often damages a company’s brand, reputation and stock price.
Negative Brand Impact
A poor ESG rating can act in opposition to a company’s brand. A poor ESG rating can contradict a company’s marketing efforts, deter potential customers and investors while also causing them to lose existing clients. To counteract this, many companies are now publicly displaying their virtues in an effort to bolster their ESG score. For example, the investment bank Goldman Sachs recently stated that they will not take any company public unless it has at least one diverse board member. Efforts like this show how companies can be encouraged to improve their ESG score to create a positive, consumer-friendly brand.
Similar to how a poor ESG rating can impact branding and deter potential investors from putting money into an organization, the global reputation of a company is also often impacted by its ESG score. Thanks to social media and the internet, the world is more connected than ever before. News, especially when it’s negative, spreads fast. For example, in 2015, ESG data companies raised several concerns regarding the car manufacturer Volkswagen’s ESG ratings. ESG data alleged issues with its governance structure and several months later, the Dieselgate scandal proved these allegations right and consequently left a permanent scar on Volkswagen’s public reputation.
Stock Price Decrease
A negative brand image and a poor company reputation have tended to be signals for a decrease in the stock price of a company. However, more investors are now considering the straight ESG score of a company when deciding how to invest. In line with current progressive culture, younger investors are more heavily influenced by a company’s ESG score, and these investors are much more likely to hold a company responsible for ESG violations. It is already possible for these younger investors to have an impact on companies alleged to have violated ESG standards. If current trends continue, these investors will gain even more influence and the ESG score of a company may become even more of a deciding factor for the value of a company’s stock.
Case Study: Facebook
Facebook’s a great example of what can happen because of a poor ESG score. In mid 2019, the social media giant was repeatedly accused of collecting and sharing user information without having acquired proper consent. As a result, Facebook was removed from a list of socially responsible companies from S&P’s index. This affected not only the company’s reputation, but also its stock price, and it may be a factor as to why the site is no longer growing like it once did.
As Facebook’s example shows, no company is above ESG criteria. Neglecting the need for improvement in gender equality, working conditions and the prevention in climate change is no longer an option, and failing to consider ESG as a vital part of your company strategy will only leave you with less investors and a damaged reputation both in the short and long term.
What is ESG Data?
ESG data provides information on the environmental, social, and governance factors of a company and is consequently used to measure how ethically viable and sustainable company operations are. This information is often collected and supplied by data providers and can be used to determine how responsible investing in a particular company is. This is known as ‘responsible investing’.
What is Responsible Investing (RI)?
Responsible investment occurs within an ethical and environmentally sustainable framework. There are different forms of responsible investment, and some of these include:
1) Ethical Investment
ESG data can determine whether a company is engaging in practices which the investor deems unethical. These unethical practices could include business transactions involving tobacco, alcohol, pornography, trade with a particular company, or even involvement with certain weapons. Controversial weapon research data can help create datasets providing further insight into a companies involvement with weapons. Knowing a company’s ethical practices can help investors make decisions on whether or not they wish to support a particular company.
2) Socially Responsible Investment (SRI)
Socially responsible investment involves investments in companies that have previously supported communities around them and seek to invest in community services and boost the overall community socioeconomic standpoint.
4) 3) Sustainable Investment
Sustainable investment supports companies that protect human rights and seek to achieve their goals through environmentally viable means, as opposed to companies that, say, rely heavily on fossil fuels. By investing in ESG data, applying responsible investment strategies, and using effective data analysis, the risk of trusting companies engaging in unsustainable practices which will limit future financial growth is minimized.
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What are the attributes of ESG Data?
For a general understanding of data attributes, ESG datasets can be broken down into three categories:
The environmental attributes of ESG databases are points that measure a company’s impact on the environment. This includes its waste disposal, sustainability of resources, and energy sources. Environmental attributes measure how the practices of a particular company impact the environment, while also raising questions about how a company intends to preserve the natural world. Since the Paris Agreement of 2020 set out the plan to reduce the 1990 greenhouse gas emission levels by at least 55% by 2030 across the EU, there has been an increased emphasis on the sustainability of individual companies and how they intend to contribute to cutting these greenhouse emissions - in other words, an increased emphasis on ESG. Environmental attributes consider the sustainability of a company’s resources and energy sources, while also considering how a company contributes to pollution and waste. These considerations can be be carried out by asking the following example questions:
Does a company use sustainable resources and energy sources?
The amount of greenhouse gases e.g. carbon dioxide and methane that a company produces can be tracked and recorded. The worse the greenhouse pollution, the lower the ESG score. However, if companies move away from the use of fossil fuels, adopt a more eco-friendly approach and increase the percentage of power generated through the use of renewable energy, a company’s ESG score can improve.
Does a company produce greenhouse gases?
The amount of greenhouse gases, like carbon dioxide and methane, that a company produces can be tracked and recorded. The more greenhouse pollution created by a company, the lower its ESG score.
Companies that are heavily invested in exploiting carbon-based resources like coal, oil, and gas tend to be penalized in ESG scoring, as it is difficult to sustainably acquire and process these resources.
How much water does a company use and how is it sourced?
The amount of water used and polluted by a company can also affect its ESG score. One example of this is the Nestlé boycott that began in 1977 and lasted into the next decade, which came about as a result of Nestlé encouraging mothers in African villages to use their baby formula instead of breastfeeding, a formula which, when mixed with the impure water sources in those villages, caused disease and death amongst multiple infants.
Renewable Energy Usage
Positive steps taken by companies to become more eco-friendly, like purchasing a percentage of their power from renewable energy sources, can have a positive impact on the company’s ESG score.
What are the Social Attributes of a company?
The social side of ESG data gives insights into data surrounding human capital, labor standards, privacy, data security, and stakeholder opposition of a company. The social attributes of ESG data considers the business relationships of a company, providing an insight into data concerning company employees, customers and the wider communities in which a company is based.
The diversity within a company also impacts its ESG data score. Recent studies have suggested that there is a strong connection between the level of diversity and financial prosperity within a company. Wider diversity within a company can help drive innovation and is consequently considered a primary indicator of a company’s overall health and ESG data score. Having a non-discriminatory and racially diverse organization is often a goal of a company. As companies become more global, ensuring work opportunities are available for a diverse range of individuals is becoming increasingly important. Equally, it is no secret that more companies are seeking to achieve a gender balance across their organizations. The ratio of male to female, and the inclusion of non-binary employees, has been an important factor in many office’s decision-making processes and companies often strive for equitable hiring practices to manage this.
However, across a number of sectors, there is a staggering lack of diversity across its employees. This is especially the case when considering those in high level positions. A study found that globally, in [2020 only 9% of CEOs were female (http://www3.weforum.org/docs/WEF_FOJ_Executive_Summary_GenderGap.pdf). There’s still a lot of work to do, and improvements to be made - which is why it’s so important that more and more companies understand the importance of ESG and how to integrate it into their business model.
As well as company diversity, the social attributes of a company’s ESG dataset is determined by an organization’s consideration for human rights. One way a company’s social attributes can be assessed is through the consideration of an organization’s Employee Turnover Rate - in other words, how long employees stay with a company and their overall satisfaction rate, which can give an indication of how the company treats its employees. Beyond this internal scope, a company’s attitude towards human rights can also be measured by how it treats and impacts the wider communities in which it is based.
What are the Governance Attributes of ESG?
The governance attributes within ESG data consider a company’s actions surrounding the distribution of the decision-making processes, taking into account corruption, business ethics, a company’s board and management structure, and its employee relationships, including employee payments and compensation strategies. Here’s a breakdown:
Structure of Management
The Structure of Management considers the balance of power between a company’s COs and Board of Directors, and the internal set of protocols that exist for both those individuals and all employees.
Improving Employee Relationships
In establishing a fair recruiting process that incorporates diversity, establishing values and policies that create a safe workplace is crucial. The Fortune 100 best companies to work for has become a coveted list for employers, as it drives the hiring of valuable talent which in turn impacts the growth of the company. This also considers the ability of workers to have representation or a union.
Compensation of Top Executives
The remuneration and bonus packages of board members and top management employees have recently become a point of scrutiny by shareholders and equity investors.
Fair Compensation of Employees
Employers are also liable to pay the employees a considerable amount pertaining to their designation. All major companies practice minimum wage standards. Actively working to close the wage disparity between genders is another important benchmark.
Pay equity audits are available for auditing and they are in many cases made available to the public forums, which open up the ethics of the company to be questioned by investors.
Who is using ESG Data?
Investors and hedgefunds use ESG data as a non-financial form of data to inform their decisions surrounding which companies to invest in. More investors are looking to ensure they are engaging in Responsible Investment (RI). ESG datasets highlight which companies are safe to invest in, while also revealing which companies are carrying out high-risk business operations and transactions.
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Investors can use ESG data to assess the sustainability and ethical standards of a company, and even compare that company’s performance to that of its peers, helping them make more informed investment decisions.
Corporates themselves can also make use of company ESG data scores to influence their own business operations, and studies suggest this can also directly benefit leadership teams, providing direction and ultimately increasing performance and revenue.
The key takeaway from all this, then, is that anyone interested in staying up to date in the business world should know about and be using ESG data to inform their decisions.
How can I use ESG Data?
ESG data can be used to evaluate companies’ business practices and influence investment decisions. Not all companies will score highly across each data attribute. However, access to ESG datasets allows companies to carry out data analysis and provides investors with the power to make decisions about what is important to them, giving them the information they need to help them avoid socially or financially risky investments. This can help investors avoid socially or financially risky investments and can help companies improve their public image.
In the case of investors, ESG intelligence can feed algorithms that analyze companies and predict the stock market, which can then inform investment decisions. ESG data is widely used when investing in public equity assets, and recently, other assets have also begun to incorporate it.
With regard to companies, ESG data is important because the right understanding and use of it can make or break a company’s image. Recall the case of Facebook mentioned above. The company was removed from an S&P index tracking socially responsible companies, which dented its public image, deterred investors and subsequently had a negative impact on its stock prices.
Understanding a company via ESG
ESG scores can help investors recognize how environmentally viable, humanitarian and ethical a company is.
The environmental impact of a company includes a lot of factors. The energy usage, conservation or destruction of natural resources, humane treatment of animals, amount of waste generation and contribution to pollution all guide the environmental criteria.
It can also include the chances of the company facing any environmental risks, and in such an event, how the company would manage such a risk. Such scenarios may include the disposal of toxic waste, compliance levels according to government regulations, if the company owns any contaminated land or if there are hazardous emissions from the factories.
The social impact of a company includes the professional relationships between the company and its stakeholders. Does the company treat the vendors in accordance with their company values? Do they partake in any corporate social responsibilities by supporting the communities in which they are based through donations to charitable organizations or through volunteer work? Does the company value the morale, safety, and health of the employees? Does the company work in the interest of the stakeholders?
With respect to the governance of the company, investors want to understand if the company operates in ethical ways, if they use correct accounting policies, and if the stockholders are privy to important decisions related to the company.
They also want the board members to be free from any situations that can create a conflict of interest. An example of this could be the company employing illegal practices and using bribes or other political contributions to do unlawful favors for third party entities. As part of determining the sustainable and ethical governance attributes of a company, ESG datasets can also allow investors to assess the governance operations of a company. ESG datasets, say, detailing a company’s involvement with controversial weapons can provide information about direct or indirect company connection to illegal or controversial biological, chemical, incendiary, white phosphorus and nuclear weapons through a traffic light category system.
It is unlikely that a company will pass every criterion in these three categories. Here, ESG ratings allow investors to decide what is important for them. Every investment firm sets priorities when they decide to follow the ESG criteria.
What are the global implications of ESG data?
ESG data and the importance of the non-financial attributes of a company’s practice is something investors have become increasingly aware of. Rather than simply focusing on immediate revenue, investors are becoming increasingly concerned with how the environmental, social and governance elements of a company impact an organization’s sustainability and determine whether it is a company they wish to invest in.
Many leaders are taking positive steps to ensure their work meets ESG guidelines and they have a long-lasting sustainability program. It has reached a point that soon market leaders will be held responsible for the firm’s ESG performance by the concerned shareholders. And with the Facebook backlash being only the tip of the iceberg, we have already started seeing the investors jump into action.
Cyrus Taraporevala, president and CEO of State Street Global Advisors, noted that “ESG issues have become much more important for us as long-term investors. We seek to analyze material issues such as climate risk, board quality, or cybersecurity in terms of how they impact financial value in a positive or a negative way. That’s the integrative approach we are increasingly taking for all of our investments.”
Here are the statistics that back up the data that investment firms are prioritizing ESG. In 2006, sixty-three investment firms who own hold around 7 billion dollars in assets, willingly signed a pledge with the Principle for Responsible PRI (Which is a movement backed by the United Nations) to hold ESG issues at high regards in terms with the decisions made on an investment. In 2018 the number closed to 1715 firms.
The data suggests more than half of the world’s asset owners have implemented ESG evaluations in their firm operation guidelines.
Although, there are still business owners who do not know about ESG or choose to ignore it as a passing social motion wave. A study conducted in Merrill Lynch disclosed that half of the United States executives had no idea that firms which employ sustainable strategy guidelines hold around 25% shares in the company. The highest number that came up in the study was 5%.
It’s still a new thing…
The general impression amongst global business leaders is that ESG is not mainstream enough to be affecting the judgment of investors.
So, even though the companies recognize their role in factors pertaining to key global issues like gender inequality at the workplace, call for fair governance and a fair wage, or global warming, many of them also believe that a sustainability agenda goes against the profits that the shareholders are concerned about.
Therefore, actually implenting ESG best practices and tweeting socially acceptable literature are two very different things for these organizations.
The good news is that this perception is quickly becoming outdated. According to recent interviews conducted with the biggest firms across the world (State Street, BlackRock, the Japan Government pension fund, Sweden, California Public Retirement System, etc.), the general consensus is that the leaders place a high importance on ESG. The ESG guidelines help investors select outliers in the industry and choose companies that value the same things as them.
Take the example of Trillium Asset Management, a Boston-based firm with a net asset of $2.5 billion that employs a chosen selection of ESG factors that position the company for long term performance. The company avoids investing in any other companies that have known association with coal mining or have more than 5% of their revenue coming in from weapons selling or nuclear power, and refuse to invest in companies that employ unethical workplace practices such as discrimination in the workplace, animal rights violations, and imbalanced governance structures.
How to find the best ESG data providers?
When determining the top market ESG data, there are a few things to consider. We see most investors stressing comparability and consistency in the data that is available in the market to construct an effective set of data based on which to score companies.
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The backbone of ESG analysis is quality data, and there is no better place to get this valuable information than from top market providers.
However, a combination of a lack of standardization and a large amount of red tape and protocols makes finding the top providers difficult.
The providers’ job isn’t any easier. To begin with, ESG sustainability reporting is not yet mandatory in all countries. Therefore, most companies are free to decide which ESG factors are considered where it impacts the performance of the business. As a result, they can disclose selective data to the public, making the data biased.
This lack of consistent and reliable information is a challenge that governments, investors, companies, and the judging public have to face.
ESG data providers are crucial in bridging the gap at this stage. They collect and evaluate information related to a company’s ESG practice and then rate these companies on various relevant factors.
The company rating methodology seems to have awakened the interest and faith in ESG investing, as many see the ratings to be an option to conducting their own ESG research - luckily for us, there are literally hundreds of vendors out there. Many of them are ESG exclusive. The exclusive ESG data providers have much more in common when reporting on ESG factors as they tend to operate on a similar rating methodology.
Along with that, there is an issue in relying only on any single provider due to the limitations. This is something you should keep in mind while making investment decisions.
What are the sources of ESG data?
ESG data comes from sources related to monitoring companies which includes annual company reports, government reports, news reports, and social media posts. The majority of ESG data comes from self-reported data however, can also be sourced from third-parties and real-time ESG data signals.
Self-Reported ESG Data:
- Company Websites
- Annual, ESG, and Proxy Reports
Third Party ESG Statistics:
- NGO/Government Reports,
- Government Websites
Real-Time ESG Signals:
- Social Media
- Company Reviews
How is ESG rating data collected?
Every ESG data provider has its own process of researching, collecting, handling, and rating methods. This is why the rating for one company can vary from one ESG provider to another.
Whether it’s by scraping company websites or social media, data providers transform and aggregate this data collected from numerous sources into clean digestible records of information, therefore they are becoming a new power player in the world of finance.
Data providers use these regulations to create their own guidelines and criteria which they then measure the company against to calculate its ESG score.
Trusting the ESG scoring provided by vendors, investors are complying with their rating systems.
These are the 3 main factors affecting the ratings:
Estimation and Data Acquisition
There is a huge difference between the ways ESG data providers collect data about companies. Every firm has data that is publicly disclosed and can be collected using traditional techniques of sourcing information.
Then, there is the unreported data, which is where the statistical model analysis of ESG providers come into play.
The models are created by data collected from similar companies and observing market trends which are considered benchmarks of the industry. These are judgment calls that data providers make when working through data acquisition for rating.
There are various factors that are material to the financial performance of a company. This section deals with that part of ESG scoring. The importance of materiality is undeniable and has been established through academic studies.
As the ESG data providers have their own proprietary rating system, they make up their own determinations that support the issues related to materiality. This is where the lack of transparency comes to play, as ESG companies rarely reveal how they arrived at these determinations.
This creates a barrier in the selection process of an ESG data provider for the managers of a company.
Weighting and Aggregate
Weighting and aggregate are also incorporated into ESG rating by proprietary algorithms. They factor in the score summary but there is no set determination of these processes.
How can I assess the quality of ESG data?
Assessing the quality of ESG data comes down to three key points: ensuring the sources are trust-worthy, ensuring the sources are diverse, and ensuring the sources are up to date.
In order to attain reliable and accurate data, you should make sure to only purchase ESG data from trustworthy, proven sources, such as government websites and company reports.
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However, vendors collecting data only from company websites and internal reports can be highly biased. Check that the data is also covered by third party sources and that the vendor is drawing from multiple sources..
Finally, assure that the provider maintains the update frequency of their data. In fact, providers offering high update frequencies often tend to collect data from various sources, like financial news reports, company reviews, and social media, which also contributes to making the data less one-sided.
For data buyers, judging the quality of ESG data is a difficult job because the metrics guiding ESG ratings can get highly contextual and be completely different in each case. There is no standardized method to how ESG data should be measured or reported, and each provider uses their own benchmarks.
What are the challenges with ESG scores?
Judging the quality of ESG data is a difficult job due to the lack of standardization. In addition, each ESG dataset provider uses their own benchmarks and consequently the metrics guiding ESG ratings can be highly contextual and different. The major points surrounding the persisting challenges across ESG data collection are summarized below:
- The local level impacts of the ESG attributes cannot be measured at the granular level.
- It can help to link ESG data with the fiscal performance of a company, though direct causation often cannot be drawn.
- Data updates from the companies happen in inconsistent frequencies and at large intervals.
- The data reported by companies can be biased. Therefore, methodologies employed by ESG companies tend to vary wide
- The lack of standardization between the methods and source of data used by various data providers when rating companies,
How can I overcome these challenges?
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Despite these challenges, ESG data providers can help and are crucial in bridging the gap and eradicating inconsistent and biased ESG datasets. They collect and evaluate information related to a company’s ESG practice and then rate these companies on various relevant factors. Data providers that specialize in collecting and processing ESG data tend to be more similar in terms of rating as they employ similar methodologies. In addition to that, investors must not rely on a single ESG provider to rate a company based on all the aspects.
Instead, the ratings should be combined and taken as a guiding factor in deciding the rating of a company. This tends to produce a much better understanding of ESG operations of a company.
How will ESG benefit your company overall?
ESG data is invaluable for providing investors with the means to carry out data analysis and establish a particular company’s sustainability. The ESG scores of a company allow investors to identify which companies consider the sustainability of their non-financial operations, helping to raise any red flags which may be detrimental to financial revenue in the long-term.
Environmental, social and governance criteria across different countries continues to determine how businesses are expected to operate in the long-term. It is through the rise in ESG that businesses are increasingly being held accountable for decisions which focus exclusively on financial gain and neglect the long-term non-financial implications of business operations. Poor ESG scores can negatively impact the reputation of a company, resulting in the eventual decline of stock price. Having access to this ESG data makes for an informed long-term investment decision, and through the implementation of Artificial Intelligence (AI) technologies, the precision of ESG scoring systems will continue to increase.
How is ESG data priced?
The cost of subscription amongst various data companies is largely unknown at this point because the providers do not disclose this information on their websites. Firms can get in touch with them directly and purchase monthly subscriptions like other services.
The factors that determine the pricing of ESG services include industry, scale, number of employees, manufacturing units, countries the country is working in, etc. However, firms can use data company platforms to get in touch with ESG data providers directly for more information about services and monthly data subscriptions, and there also a number of government websites which can provide investors with basic ESG information.
ESG data is invaluable to the value analysis of a company, and it will continue to provide investors with valuable insights on the sustainability of a company. It will alert investors to red flags associated with any company’s portfolio.
The social, climate and other factors continue to determine how businesses should operate in the future. Businesses are going to be held responsible for the choices made instead of financial interests when a long term impact has been neglected in favor of capitalizing on shorter-term financial success.
ESG data providers are new in the market and a lot of ESG as a whole is veiled under a shroud of speculation. However, with the implementation of newer technologies like artificial intelligence, the ESG scoring system will continue to get much more accurate than it is today.
The methodologies of these companies might remain hidden due to proprietary reasons, but the findings will begin coinciding with each other because machine learning has the capability of analyzing billions of data points to formulate the ratings, which is not an advantage analyst driven analytics alone can provide.
The right choice for investors is not to be tangled in the financial, social and governance methodologies, but to understand the scoring from various data providers. More specifically, data providers who specialize in ESG data and employ data acquisition from various balanced sources to ensure a much stable and reliable rating.
Finding the right ESG data
So there you have it - a comprehensive guide covering all you need to know about ESG data, from its definition and importance, to the top providers and its use cases.
To take the next step in finding the right ESG data for you by checking out the Datarade ESG providers page to see which providers can give you the ESG data products that you’re looking for. Datarade has assembled the top ESG data providers from around the world to give you all the choice you need when finding the data that will drive you results.
Where can I buy ESG Data?
Data providers and vendors listed on Datarade sell ESG Data products and samples. Popular ESG Data products and datasets available on our platform are Sustainable Development Goals (SDGs) Data | Worldwide Public Companies ESG data | Datacie ESG by Datacie, RGS | Contribution to UN Sustainable Development Goals (SDG) Tool & ESG Impact Data by Richmond Global Sciences, and Reported Sustainability Data for 2200+ Listed Companies by GIST.
How can I get ESG Data?
You can get ESG Data via a range of delivery methods - the right one for you depends on your use case. For example, historical ESG Data is usually available to download in bulk and delivered using an S3 bucket. On the other hand, if your use case is time-critical, you can buy real-time ESG Data APIs, feeds and streams to download the most up-to-date intelligence.