What is ESG Data & How to Use It

What is ESG Data?

ESG data stands for data on 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. Nowadays, as we are slowly entering the age of ESG investing, ESG data is becoming ever more important. It involves looking at 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. 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.

How to use ESG data?

Investment firms and hedge funds use the data to help them 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.

What are typical ESG Data attributes?

Environmental
Data points that measure a company’s impact on the environment with its carbon emissions, natural capital, renewable energy, and water stress.

  • GHG/Revenue
  • GHG/MBOE
  • Carbon Reserves
  • Renewable energy usage
  • Water stress

Social
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

Governance
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 is ESG Data typically collected?

The data type is very 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. Data providers transform the chaotic web of information 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 is ESG Data 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 when buying 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.

What to ask your ESG Data provider?

  • How do you collect your data?
  • Which 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?

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