The ESG data files - introduction

Channels: ESG, ESG Data, Investment

Companies: BNP Paribas, Schroders, Opimas, MSCI, Sustainalytics, InfluenceMap, S&P Global, Moody’s, Trucost, Vigeo-Eiris, Bank of England, European Commission

People: Mark Carney

ESG data has gone 'mainstream'. But how good is it, and in what ways does it need to improve? Environmental Finance is today launching a series of features to answer these questions. Peter Cripps reports

People who work in the field of 'responsible investment' will be familiar with the claim that environmental, social and governance (ESG) investing has "gone mainstream".

This is supported by the fact that investors with a combined $86.3 trillion of assets have signed up to the Principles for Responsible Investment, meaning that they commit to adopt ESG in their activities.

But despite the growing momentum behind responsible investing, the ESG data that underpins this movement is often criticised.

In a survey of the market by BNP Paribas Securities Services, 66% of respondents cited problems with data as a significant barrier to greater adoption of ESG across their investment portfolio.

These criticisms include that the data is of poor quality, that it does not have a sufficient track record, and there are gaps in the data because not enough companies report the information investors require, particularly in certain regions or sectors of the economy.

An industry of data providers has sprung up to service this demand for high quality data that can inform investment decision making. These range from the established ESG ratings agencies, such as MSCI and Sustainalytics, to smaller providers that focus on specific issues, such as InfluenceMap, an NGO that explores companies' lobbying activities.

Total spending on ESG data, including indexes, was $505 million in 2018, according to a report by Opimas. It predicts this figure will reach $745 million by 2020.

Total spending on ESG data, including indexes, was $505 million in 2018

There are currently some 150 ESG data providers, despite a wave of consolidation in recent years, although the market is dominated by a handful of players.

This army of data providers is growing and evolving.

The biggest credit rating agencies, S&P Global and Moody's, have entered this arena, with S&P buying environmental data firm Trucost and launching green bond and ESG evaluation tools. Moody's, which also offers green bond assessments, recently bought French ESG data firm Vigeo-Eiris.

While it is sometimes referred to as "non-financial data", ESG data is becoming more obviously material to investors. For example, ESG indexes and the funds that track them are helping steer capital towards companies that have a better ESG profile.

The Opimas report says the number of ESG exchange-traded funds has increased from 71 in 2016 to more than 140 in 2018. Their assets under management have increased from $5 billion to more than $14 billion over the same period.

While it is sometimes referred to as "non-financial data", ESG data is becoming more obviously material to investors

Sometimes executives can see their remuneration affected by ESG performance.

Billions of dollars of loans have been extended to companies with interest rates that vary according to the company's ESG performance.

With ESG ratings being used to determine the interest rate of a company's debt, they are clearly becoming more influential. Yet some in the market are perturbed by the fact that different ESG rating agencies can draw radically different conclusions about the same company.

A recent report by asset manager Schroders accused some ESG reports of being little more than "random".

One ESG specialist at an asset manager told Environmental Finance: "The PRI has grown massively over the past 10 years. ESG has got big before it got mature.

"There's a lot of people who are outsourcing all their analysis, and there is not enough transparency or analysis of what the ratings firms are doing. That all has to change."

“Industries normally start small and evolve as they grow up – by the time they get to be big, they are sophisticated,” Jason Channell, Citi’s head of ESG research, told a recent Environmental Finance conference. “But sustainability [data] has exploded and it’s now pretty much universal yet in terms of our sophistication, it’s pretty much in the dark ages. Rarely do you find anything that’s that big and that basic.

“That’s a great opportunity for us all.

Jason Channell, head of ESG research, CitiHe said much of $31 trillion of ESG assets is in “ESG Leaders funds” and the investors are not necessarily “kicking the tyres”, but relying on ESG ratings.

“We are seeing extraordinary moves in stock prices because they are being upgraded by external data providers on what might be a relatively immaterial point which will move it to an ‘Industry Leader’... and a large part of the $31 trillion of ESG assets will buy it when it gets upgraded.”

However, the ESG industry is constantly growing in sophistication, he said.

Despite its current pitfalls, the potential of ESG data to help build a more resilient financial system has caught the eye of Bank of England governor Mark Carney.

"In the future, climate and ESG considerations will likely be at the heart of mainstream investing," he said in a speech in Brussels at a recent sustainable finance conference organised by the European Commission. "Investors will tailor their investments and fulfil their fiduciary duties through: better quality and more widely available data on sustainability and performance; superior data analytics through the advent of artificial intelligence and machine learning; and more informed judgements of strategic resilience."

In particular, he hopes better disclosure of climate risks will help avoid a sudden rush to the exit by investors in carbon-intensive companies, in what he describes as a "climate Minsky moment". But he also points to research that shows ESG data can help identify companies with greater earnings stability and lower share price volatility.

Environmental Finance is today launching a series of features that aims to explore the quality of ESG data, its strengths and weaknesses, the ways in which investors would like to see it improve, and the potential for new sources of ESG data to enhance the current offerings.

This article is part of a series of features exploring ESG data.

  • To read 'The ESG data files – introduction, click here
  • To read 'The ESG data files – part one: reported data', click here
  • To read 'The ESG data files – part two: non-reported data', click here
  • To read 'The ESG data files – part three: ESG rating agencies', click here
  • To read 'The ESG data files – part four: fixed income data’, click here
  • To read 'The ESG data files – part five: the impact of the EU’s taxonomy’, please click here
  • To read 'The ESG data files – part six: TCFD and the challenge of looking forward’, click here
  •  To read 'The ESG data files - part seven: Building data for real estate', click here

 This series of features will be published alongside a directory of ESG rating providers.

Further features on this theme may follow. Please email peter.cripps@environmental-finance.com with any thoughts.