What is ESG Data?
ESG data is the data data related to environmental, social and governance topics, which represent the three main factors in measuring the sustainability and ethical impact of an investment in a company or business.
This data is important because it reflects how good a company is at managing and disclosing non-financial factors that are relevant to the long-term health of its business and its license to operate.
Under the social tag, the ESG data sheds light on gender equity, workforce diversity, and human rights. When it comes to governance, the factors that are highlighted include labor practices, corruption, and gender composition.
Sustainability standards are on the rise, as the impact of climate change only grows more severe. Investors are now utilizing ESG data in their financial analyses and discovering meaningful opportunities in the global economy.
Who Uses ESG Data and For What Use Cases?
ESG data is important, more so, because it can make or break a company’s image. Take the case of Facebook, for instance. The company was removed from an S&P index tracking of socially responsible companies as it lacks transparency and collects and shares user information.
This is how ESG data helps investment firms and hedge funds to decide which company they might want to invest in and to avoid companies that might pose a greater financial risk due to their environmental or other practices.
In many cases, ESG data can be utilized like any alternative data source for financial analysis purposes. For example, given the increasing power of AI in predicting the stock market, large amounts of ESG data can be used to feed the algorithms. Learning from ESG data, the algorithms can better evaluate sustainalytics cases and predict the future.
ESG data is widely used when investing in public equity assets, however, other asset classes are also preferring its usage.
More and more investors consider the factors related to environmental, social, and governance (ESG) before investing in a company. This practice is on the rise these days. Bloomberg reported that assets managed through this approach increased by 37 percent in 2017 alone.
Various investors also use ESG data to drive their stages of investment based on their objectives like portfolio construction, risk management, security selection, and asset allocation and so on.
What Are Typical ESG Data Attributes?
Data points that measure a company’s impact on the environment with its carbon emissions, natural capital, renewable energy, and water stress.
- Carbon Reserves
- Renewable energy usage
- Water stress
Gives insights on data surrounding human capital, labor standards, privacy, and data security and stakeholder opposition of the company.
- Women Employees Ratio
- Employee Turnover
- Employees Unionized
- Lost time in incident rate
- Gender Equality Index
Takes into account data about the board, pay, corruption, business ethics, and fraud.
- Nr. of independent directors
- Percentage of board members
- Director avg. age
- Director Meeting Attendance
- Board size
How ESG Data Is Typically Collected?
The data type is much dispersed and non-standardized, therefore different vendors aggregate it from various sources and use their own methodologies in constructing the final ESG scores and reports.
Data providers collect the data from company websites, their ESG, annual and other proxy reports. On the macro level, they collect data from academic, government and NGO websites, financial news and reports, company reviews and social media.
Generally, companies often share this crucial information as public disclosures through their annual reports, ESG disclosure surveys, and social responsibility reports.
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.
How To Assess The Quality Of ESG Data?
Data buyers have a hard time assessing the quality of ESG data because ESG metrics are not comparable and are highly contextual. There is no consensus on how to report, measure or incorporate ESG metrics.
Evaluations are largely based on voluntary, non-standardized and unaudited disclosures. Some companies present ESG data as part of integrated reports that combine traditional financial disclosures with non-financial data, while others present stand-alone versions of their sustainability reports.
There are no common properties to evaluate the overall quality of ESG data. Until ESG reporting standards are ubiquitous and obligatory, ESG investing will always be part science, part guesswork.
Even though data quality is hard to measure, there are some guidelines you can follow when buying ESG data. Most importantly, try to track sources of the data and make sure they are established and trust-worthy. Keep an eye on the diversity of the sources.
Vendors collecting data only from company websites and internal reports can be highly biased. The last, but not least important factor is the update frequency. Providers offering high update frequencies in most cases additionally collect data from financial news and reports, company reviews and social media which highly contribute to making the data less one-sided.
How ESG Data Is Typically Priced?
Like with many data types, providers can offer ESG data based on monthly subscription pricing models. The cost of the subscriptions is largely wrapped in mist, since data providers usually don’t disclose it on their website, but you have to get in contact with them directly. Sometimes this data type is even offered by governmental institutions for free.
What Is the #1 Issue with ESG Data?
There is a lot of data which is solely relying on the companies’ own annual and ESG reports. Collecting data only from a company’s own sources can lead to bias. Investors are increasingly interested in ESG data, but they find it challenging to access data that is reliable and comparable.
The industry is lacking standardization and transparency, but this is slowly starting to change with efforts to push for the harmonization of non-financial reporting, especially in Europe, Asia, and the US. The harmonization of ESG regulations is good in principle but faces major obstacles given the complexity and variety of ESG issues and lack of consensus among regulators.
Here are a few limitations that the industry is crippled with:
Inconsistent reporting metrics
Since sustainability reporting is voluntary, this has made way for messy data. The various metrics on which data is reported and analyzed is not consistent. This makes it difficult to compare the data across companies.
Although the data is periodically made public, the provided data is incomplete which makes reliable assessment a tough task to achieve. Most companies are still reluctant when it comes to disclosing data on key environment issues publically.
The ESG scores, rankings, and ratings provided by data firms are not reliable. They follow different assumptions which makes the data vary from one provider to another. For instance, one firm might rank Tesla as the best while the other firm might rank it worst based on their individual scoring process.
What To Ask Your ESG Data Provider?
To make the right choice, and to ensure that you are getting the best data, here are a few questions that you can consider asking your ESG data vendor:
- How do you collect your data?
- What are your data sources?
- How do you ensure the quality of your data?
- What is the update frequency you offer?
- How can I access the data?
- What kind of integrations do you offer?
- On what basis is the data evaluated?
You must also ask other relevant questions keeping your requirements and use case in mind.