ESG investing and the great data challenge
Sustainable investment is booming, but many investors struggle to access robust data on companies’ ESG performance. Financial market operators must step up and fill the information gap.
While the growth of sustainable investment continues apace, investors are becoming increasingly frustrated with the lack of high-quality, comprehensive and trustworthy data to assist them in their decision-making processes. A survey of almost 200 global asset owners by London Stock Exchange Group subsidiary FTSE Russell found 59 per cent were concerned about the lack of standardisation in ESG data, scores and ratings.1
It is a common complaint. EY’s most recent Global Institutional Investor2 survey revealed widespread concern about inadequate disclosures of ESG risk. “There is a profound disconnect between the ESG data that asset managers need and what is available to them,” warns Anthony Kirby, EY’s Wealth and Asset Management Consulting Regulatory Intelligence Lead.
No common ESG disclosure framework
One problem is the proliferation of reporting standards and regulations, with global regimes competing with local rulebooks, self-regulatory systems butting up against mandatory requirements and separate frameworks applying to companies and investors taking stakes in them.
Some businesses have embraced the Global Reporting Initiative (GRI), which sets out best practice for sustainability reporting, while others are more focused on the Sustainability Accounting Standards Board (SASB) standards on financially material issues. Even the language of regulation is disconnected: the EU’s Benchmark Regulation talks about “ESG factors”, while its Taxonomy Regulation and Sustainable Financial Disclosure Regulation (SFDR) refers to “sustainability”. Even attempts at standardisation, such as the CFA Institute’s Global ESG Disclosure Standards announced in November 2021, are voluntary.
A related issue is the quality and consistency of the ESG data that is available. In some markets, there is a significant amount of data to access, while in others substantial shortfalls persist, particularly with smaller companies.
Building consistency in ESG data disclosure
In practice, responsibility for driving that improvement will fall to a number of different parties. However, financial market operators will play a crucial role in improving the availability and quality of data.
Julia Hoggett, CEO of London Stock Exchange (LSE), which issued guidance on ESG data reporting in 2017, says listed businesses have to recognise that shareholders and potential investors now want much more detailed information on their environmental performance. Hoggett says subsequent initiatives have included guidance specifically on climate reporting as part of a broader effort to help issuers identify the key metrics that investors need.
“Climate change represents the greatest challenge of our time, and it is essential that the financial market ecosystem supports and stimulates the action necessary across the economy to meet that challenge,” Hoggett argues. “Our new climate transition offering will help issuers understand how investors view their performance on the transition and facilitate change by providing an action-orientated climate reporting framework aligned with global standards.”
Operators can also supplement the work of ESG ratings agencies. For example, LSE’s Green Economy Mark identifies London-listed companies and funds that derive more than 50 per cent of their revenues from green products and services. And the Green Revenues 2.0 data model developed by FTSE Russell, an LSE Group business, has identified that out of more than 16,000 globally listed companies covered, around 3,000 have exposure to the green economy. These businesses account for more than 5 per cent of the total listed equity market and have a combined market capitalisation of $4tn.
Other players will make contributions, too. In some cases, investors are creating entirely new resources. For example, CCLA, the largest investment manager of charity assets in the UK, is gathering new data on how companies address the issue of mental health in order to create a benchmark that rates listed companies on this issue.
New entrants to the financial services sector will also support innovation. Google, for example, has worked with HSBC to create new tools that help the bank measure the potential impacts of climate change risk on its trading book.
However, one advantage of tackling the data issue at source is the potential to secure greater consistency of information at the point it is disclosed. EY points out that some asset management firms can use up to 10 different third-party ESG data vendors to cover their needs. If listed companies with equity or debt trading on the largest markets were all to abide by the same reporting standards, such problems might be reduced.
This is what investors will increasingly look for, argues David Harris, Global Head of Sustainable Finance, Data and Analytics at LSEG. “The finance and investment community can drive the solutions to secure a sustainable and net zero emission future,” he says. “[But] to achieve this, there is a need for robust data and analytics.”
