ESG Data in 2022: What You Need to Know

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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.

Key Points

  • 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

Environmental data on a company measures the impact of its operations on the climate and ecosystem. It can include attributes like:

  • Greenhouse gas emissions
  • Biodiversity
  • Pollution
  • Resource depletion

Social

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

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

Environmental detection

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.

Web crawlers

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.

Official reports

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

Granularity

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

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.

Timeliness

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.