The Ultimate Guide to ESG Data
Table of Contents
- What does ESG stand for?
- Why are ESG scores important for companies?
- What is ESG Data?
- Who Is using ESG Data?
- How can I use ESG data?
- How to find the best ESG data providers?
- What are the sources of ESG data?
- How is ESG rating data collected?
- How can I assess the quality of ESG data?
- What are the challenges with ESG data?
- How is ESG data priced?
- Finding the right ESG data
The environmental, social, and governance aspects of a company have a significant impact on how the business performs and how it is judged externally. For this reason, interest in acquiring ESG data has skyrocketed among data providers, potential investors, and companies alike.
With ESG data being so valuable, it is important to have a good understanding of what it is, how it is sourced, and how you can use it. This Ultimate Guide will therefore provide you with all the information you will need about ESG data, 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?
The environmental, social, and governance (ESG) criteria are a set of standards applied to a company’s operations that help to evaluate the company’s overall performance and health.
These standards are set by government regulations to ensure that companies are run in a fair, sustainable, and equitable way. Thus, the criteria are not directly interested in how financially successful a company is, but focus rather on the sustainability and ethical standards of its business practices.
Here’s a quick look at each criteria topic:
The environmental criteria are measured against how well a company upholds regulations that protect the environment.
The social criteria are based on the standard with which a company treats its own employees, customers, vendors, and the communities it is based in.
The governance criteria relate to a company’s tax audits, its shareholder rights, and the salaries of its top-level executives, as well as the controls it places on these internal policies.
While government regulations set the foundation for these criteria, it is ESG data providers that tend to evaluate how well companies adhere to them. ESG data providers measure a company against their own checklist and use this to calculate an overall ESG score for the company.
This score is important to a company for a number of reasons, not least regarding its ability to continue business into the future.
Why are ESG scores important for companies?
The ESG score of a company is often integral to its ability to continue operating. A poor ESG score can spell disaster for even the most financially successful of organizations. The impact of a poor score is often damage to the company’s brand, reputation, and stock price.
Take Facebook as an example. 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 the power of the ESG criteria. Ensuring a good ESG score is thus vital for any business that wants to continue growing and delivering results.
The reason why an ESG score is so impactful is largely because of the current culture in many countries worldwide. In the face of demands for better gender equality, improved working conditions, and a real solution for climate change, governments are under pressure to push for stricter regulations.
These regulations bring more prominence to ESG criteria, thereby making ESG data providers more influential. This in turn gives more power to an ESG score, meaning that a company’s is more important in the public eye and to its future development.
Here are some of the ways a poor ESG score might affect a company:
Negative Brand Impact
A poor ESG rating can act in opposition to a company’s brand, giving out a message that contradicts its marketing efforts. This can turn away potential customers and cost a company 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 company’s 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, 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. Any news, especially negative news, spreads fast.
For example, in 2015 ESG data providers raised several concerns regarding the car manufacturer Volkswagen’s ESG ratings. They alleged issues with its governance structure. Several months later, the Dieselgate scandal proved these allegations right, leaving 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 taking into consideration 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.
What is ESG Data?
ESG data is information on the three key factors that are used to measure the sustainability and ethical conduct of a company: environmental, social, and governance factors. This information is often collected and given by data providers, who measure companies against the criteria determining these factors.
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These factor-defining criteria are comprised of several attributes, including:
The environmental attributes of ESG data are data points that measure a company’s impact on the environment. This includes its waste disposal, sustainability of resources, and energy sources.
Greenhouse Gas Production
The amount of greenhouse gases, like carbon dioxide and methane, that a company produces can be tracked and recorded. The worse the greenhouse pollution, the lower the ESG score for this attribute.
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.
The amount of water used and polluted by a company can also affect its ESG score. Nestle’s ethics came in question when they were found practicing unethical ways of affecting water sources of African villages to peddle a particular baby formula that was discouraging breastfeeding.
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.
The social attribute side of ESG data gives insights into data surrounding human capital, labor standards, privacy, and data security, and stakeholder opposition of the company:
It’s no secret that many companies strive to achieve a balance of genders in their organization. The ratio of male to female, and the inclusion of non-binary genders, has been an important factor in many office’s decision making processes, Thus, companies often strive for equitable hiring pracitices to manage this. However, companies in some sectors and some upper level positions within these companies may not be up to standard.
Number of Diverse Employees
Like with gender equality, having a non-discriminatory, racially diverse organization is often a goal of a company. As companies become ever more global, ensuring work opportunities to those from all backgrounds and countries is important. This is because it can bring a wider variety of perspectives and drive innovation in the company. Workplace diversity is considered a primary indicator of a company’s health and heavily influences recruiting.
Employee Turnover Rate
How long employees stay with a company and their overall satisfaction rate can also affect a company’s ESG score. This is because such numbers may offer insight into how the company treats its employees.
The governance attributes take into account data about the board, pay, corruption, business ethics, and fraud:
Structure of Management
The equity valuation of a company considers the internal set of protocols that creates the structure of a company.
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 this drives the hiring of valuable talent and has an impact on the growth of the company as a result. This also considers the ability of workers to have representation or a union.
Compensation of Top Executives
In recent times the remuneration and bonus packages of board members and top management employees have become a point of scrutiny by shareholders as well as 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?
ESG data primarily helps investment firms and hedge funds to decide which companies they want to invest in and to avoid companies whose business practices may threaten their future operations.
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With ESG data, investors can assess the sustainability and ethical standards of a company, and even compare its performance to that of its peers. This helps investors to make more informed investment decisions.
Companies themselves can also make use of ESG data to influence their own business operations.
Studies suggest that taking note of ESG data analytics is also in the best interest of company leadership teams. The report suggested that an inclusive and sustainable operating model can actually increase the performance and revenue of a company.
Thus, 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. This can help investors to avoid socially or financially risky investments and can help companies to improve their public image.
In the case of investors, ESG data can feed algorithms that analyze companies and predict the stock market. This can then inform investment decisions. ESG data is widely used when investing in public equity assets, however, other asset classes are now also beginning 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 and affected its stock price.
Understanding a company via ESG
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 will be managing 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 includes the professional relationships between the company and other stakeholders. Does it treat the vendors in the same ethical way that complies with their company values? Do they partake in any corporate social responsibilities by doing betterment of the community (donate to charitable organizations, do 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. Whether the company employs illegal practices and uses bribing or another sort of political contributions to do unlawful favors to third party entities.
It is unlikely that a company will pass every criterion in these three categories. Here, ESG scores allow investors to decide what is important for them. Every investment firm sets priorities when they decide to follow the ESG criteria.
What Is the global impact of ESG?
Investors have been educated and vocal about sustainability concerns for many years now, and this is having an increasing impact on their investment decisions.
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 said “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 percent shares in the company. The highest number that came up in the study was 5 percent.
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, practicing along with the ESG guidelines, and tweeting socially acceptable literature are 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. The firm 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.
They also do not 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 investment 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, not all the governments in the world require the companies operating within its country borders to report their ESG data. Therefore, the 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 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 any source that is related to monitoring companies, such as annual company reports, government reports, news reports, and social media posts. These sources can be self-reported, sourced from third-parties, or can come from real-time ESG signals. The
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?
Whether it’s by scaring 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.
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.
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 as 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 data?
We have discussed the issues that persist in ESG data collection in the article above. Here are the major points 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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ESG providers that specialize in collecting and processing 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 is ESG data priced?
The cost of subscription amongst various ESG data providers 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 avail 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. There are also a number of government websites that can offer this data for free for any investors wishing to check-in.
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 of 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 momentary success.
ESG data providers are new in the market and a lot of it 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, 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 simply analyst driven analytics 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 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.