The rise and rise of ESG data
Without doubt, sustainability and climate change are defining themes of our age. It is something that cuts through industries and directly, or indirectly each and every one of us. The increased awareness of the risks presenting is changing financial services. The discourse around climate change will continue to intensify as extreme weather, from floods to fires, continues to cause chaos all over the world. This is elevating the status of ESG investing.
As we are already 1-year in to what the UN is calling the decade of action on climate change and with the UK hosting the UN Climate Change Conference this year (COP26) it is imperative that we get this right.
ESG means the use of environmental, social and governance factors to evaluate companies and countries on how sustainable they are. ESG’s remarkable rise has led to a boom in interest in impact investing, green and sustainable bonds and fossil fuel divestment, alongside a multitude of other hot investment themes.
Previously niche sectors that only a few years ago seemed little more than a PR exercise for banks and investment managers are now meaningful drivers of status, strategy and profit. ESG is now a mainstream part of financial services and data has played a central role in that shift. That is nothing if not to mention the purpose and good derived from sustainable finance and investing.
ESG is here to stay
The rise of data is allowing more insight to be gained across all sectors in financial services. And that data is coming from a wide and diverse range of sources, from crop performance in wheat fields to consumer behaviour in different geographic markets.
This is especially true in ESG. Its rise in popularity has caused the amount of accessible data to spike. This effect is compounding as a growing number of investors take more sustainable views of their portfolios. Financial regulators are also playing their part, placing sustainable mandates at the heart of the industry’s regulatory requirements.
The recent purchase of Refinitiv by the London Stock Exchange backed up this point. A reason for the acquisition was LSE’s want to access the large swathe of ESG data that Refinitiv had to offer. LSE believed this data would allow it to compete with other big data players, such as Bloomberg, across a broader range of sectors. In this is something of a ‘data war’, then ESG data is all-important.
Without doubt, increased competition will improve the quality of ESG data, but despite the contribution these data providers have made advancing ESG’s profile, this data still has its limitations. When compared to more mainstream asset classes, it remains far from fully formed.
Context means quality
At Mudano, we know how capturing and accessing data is only half of the battle. What’s more important is context. Without context, data cannot show its value. Knowledge may be power but too much knowledge is noise. It’s crucial that financial services companies capture ways to interpret the vast amounts of data at their disposal, especially in new markets like ESG.
How the various data levers connect and intersect, how that data can be applied in a business context, how it helps businesses to personalise their products or develop new ones. All need to be considered and leveraged in a data-driven environment.
In terms of ESG it is quality data that is the key to investment analysis. Quality can be defined in several ways, most agree that consistency and comparability in the availability of data are essential elements of an effective data set. In ESG, this quality is lacking for a number of reasons.
One reason is that governments around the world don’t require companies to report their ESG data consistently. Companies are left to determine for themselves which factors are material and what information they should disclose to investors. Hence, the ESG data quality being collected at source is skewed and the data’s context is hard, if not impossible, to ascertain. As mentioned before, it is noise that compounds the confusion.
Finding needles in haystacks
It’s imperative that financial services professionals solve the data challenge in ESG. Investors increasingly view ESG as being a critical driver of a company’s ability to generate sustainable long-term performance, so professionals must get to grips with ESG and fast.
Hence, sorting signal from the noise is the key to getting value out of ESG and alternative data sources. This is true for all data sources, especially in capital markets where data is omnipresent. But in new sectors, such as ESG, where data is a little rougher around the edges, it’s imperative that frameworks and principles are put in place to govern how a firm accesses and uses data.
If used in the correct way, data can enrich financial services professional’s viewpoints beyond the business, allowing them to make quicker and more accurate investment decisions. In turn, this will enable businesses to have more engaging front-end relationships with clients and more transparent backend systems, driving growth and profitability.
A shifting data landscape means big opportunities
The responsibility falls on managers to control the data being presented to employees. A crucial part of this is avoiding data overwhelm, making sure that the people who need information get the information they need. Data-Driven reinvention can aid businesses not only navigate through this confusion but work towards imaging a business future-state that works to their advantage. Tools like AI can sift nuggets from the wealth of data sets or collate data sets into something usable, combining human expertise with best-in-class technology today while re-invention can drive the business towards new horizons.
What’s encouraging for all firms is that in sectors like ESG, whilst some data sets are new and many are still unstructured and imperfect, the data doesn’t have to be proprietary. Alternative data providers can provide high-quality help.
It’s thanks in no small part to these alternative data providers that the ESG data sector is booming and being advanced at such a great pace. In time, this will allow all firms to access the data they need to make informed, contextualised decisions about the ESG sector. And that will be all-important as ESG continues to gain in popularity.