The surge in ESG-labelled investment has been accompanied by a comparable flood of ratings, but the patchwork nature of regional data presents challenges.
Rising demand for ESG funds has triggered a rush on the data market, with companies such as Bloomberg, Fitch Ratings, S&P, Morningstar, MSCI, InvestAssure and others piling into the ratings game, promising risk-assessment scores of unparalleled rigour and depth. ESG ratings have, evidently, transformed rapidly into an investment must-have.
The numbers have ballooned accordingly. The ESG data market passed US$1 billion in 2021 (with a degree of fanfare) and forecasts suggest it will keep growing at between 20-30% a year. Last year, management consultant Opimas said, more than US$720 million was spent on ESG research and analytics, and more than US$300 million on indexes.
As the market expands, some companies are recognising the need to reflect regulatory and investor demands, appointing ESG officers and teams to manage corporate sustainability programmes and ensure they achieve ratings that keep them on the green side of the fence.
Regulation and data market growth go hand-in-hand, so it’s unsurprising to see Europe leading the world as investor demand prompts more stringent reporting and disclosure requirements, which in turn drives demand for more and better information to support those disclosures.
It’s equally unsurprising perhaps to see Asia-Pacific lagging. The region accounts for a rapidly rising share of ESG investment capital but only about 10% of the global ESG data market, according to estimates. This, coupled with a nascent taxonomy process, makes investors even more than usually vulnerable to greenwashing.
The landscape is changing rapidly though, with regulators across the region moving towards ESG disclosure legislation.
“Authorities in – to name a few – Singapore, Hong Kong, Australia, and the Philippines have progressed in respect of frameworks and guidelines that encourage the building of a suitable application in the environment or climate-risk domain of many conventional risk-management practises,” said Prashant Joshi, Director for Global Markets and APAC Regulatory Affairs at BNP Paribas.
Familiar issues remain, however – chief among them being a highly fragmented and relatively undeveloped data landscape.
“The lack of high-quality standardised ESG data on companies, especially in Asia, remains a key impediment to unlock capital at the speed and quantum needed for the region’s transition towards lower-carbon economies,” Helge Muenkel, Chief Sustainability Officer at DBS, told Regulation Asia.
Developing taxonomies is challenging enough; feeding reliable, credible information into those systems in a region as diverse as Asia with widely differing levels of regulation and transparency is even more daunting.
“The lack of high-quality standardised ESG data on companies, especially in Asia, remains a key impediment to unlock capital at the speed and quantum needed for the region’s transition towards lower-carbon economies.”
– Helge Muenkel, Chief Sustainability Officer at DBS
Some Asian economies have established greater consistency and transparency, such as through introducing TCFD-aligned (Taskforce on Climate-related Financial Disclosure) regulations in Singapore, Hong Kong and Malaysia, or sustainability reporting and stewardship codes in Taiwan and Japan.
China has made progress too, especially in environmental reporting requirements such as through the release of Environmental Information Disclosure Guidelines for Financial Institutions last year. The Securities and Exchange Board of India (SEBI) has meanwhile been having ongoing consultations on ways to enhance its existing ESG regulations.
While there has been a surge of data disclosure in Asia, the lack of a unified set of rules across the region opens the door for inconsistencies that make it difficult for investors to make like-for-like comparisons.
Faced with the task of evaluating everything – from carbon emissions throughout entire supply chains, to a company’s performance on issues of diversity, disability or gender, and its record on workplace safety or environmental pollution – there are inevitably enormous data gaps, and those gaps are often filled by assumptions.
One rating system might interpret a lack of information on violations as meaning a company is “clean” (rather than perhaps under-reporting), or a company operating in a highly regulated country like Singapore might automatically be given a higher rating than one from a more loosely regulated jurisdiction such as Cambodia.
Patchwork of information
Ratings – like Asia’s taxonomies thus far – have been largely based on voluntary participation and reliant on corporate self-disclosure, and negative events such as environmental spills or serious workplace accidents are frequently evaluated as part of due diligence and risk assessments, without contributing to a long-term rating of a company’s ESG performance.
This patchwork of information must then be used to form a picture, like a jigsaw with multiple missing pieces. A rating based on this mixture of fact, assumption, and self-disclosure must then be weighed against peer companies for it to have any investment value. In Asia, which is particularly replete with family conglomerates operating highly diversified interests, defining a peer group satisfactorily can be difficult (or even impossible).
An Economist Intelligence Unit survey found that between 25-30% of companies cited inadequate or insufficient data, lack of clarity around ESG standards, and inconsistent ratings and data applications as major obstacles to integrating ESG principles.
A separate study by FTSE Russell concluded that while small steps on carbon emissions disclosures have been made, the disclosure gap is actually widening as demands for more complex information grow and governments stall on introducing mandatory reporting.
Around half of emissions estimates diverge more than 100% from actual reported data, the study found. As more investors demand that their entire portfolios fall into line with ESG standards, those standards are increasingly being applied to rate companies in markets where levels of data and disclosure are low, such as in many parts of Asia. The quality of those ratings is consequently less valuable to investors.
Unsurprisingly, then, the conclusions formed from disparate data sets by these ratings products vary widely.
One study found that the correlation between ESG ratings from “prominent agencies” averaged 0.61, whereas the correlation between credit ratings from agencies like Moody’s and S&P was more than 0.9.
This creates enormous challenges for governments, companies, and investors.
“Data is a key issue,” said Jason Norman Lee, Managing Director of Legal and Regulatory at Temasek International in Singapore. “Different asset managers and banks require different types of data or different granularities of the data, and this creates a reporting, collation and operational burden on companies.
“The challenges are in understanding the nuances of the regulations and ensuring that there is sufficient capacity within an organisation to apply them in daily business activities; and then collating and processing the data (which may have integrity issues) required to ensure compliance.”
Winds of change
Change is coming though, and there are efforts at both a national and international level to make some sense of this alphabet soup.
A Singapore-based registry has been launched to help financial institutions and investors access ESG data, for example. ESGpedia was created by a Singapore-based fintech company, Hashstacs, in conjunction with the Monetary Authority of Singapore (MAS) as part of Project Greenprint, which aims to set up data platforms and harness technology to help mobilise capital for green projects.
The blockchain-based registry will aggregate and maintain ESG certifications and data across various sectors on a single platform, with the aim of leapfrogging the slow certification process, which is in part the result of fragmented data. It launched with 168,100 certificates, covering 60,552 companies and 110,500 assets.
The data can be accessed by banks, asset managers, investors, insurers and exchanges, as well as non-financial institutions.
“The Stacs ESGpedia registry platform aims to tackle the data problem head-on by creating a trusted centralised data repository for banks and investors to track a company’s progress measured against a standardised set of sustainability metrics,” said Muenkel at DBS.
A series of international efforts are underway to tackle the same problem.
The International Sustainability Standards Board (ISSB) is scheduled to finish the development of a new single global baseline for climate disclosures this year, in the hope that countries will voluntarily adopt them into law.
The Task Force on Nature-related Disclosures (TNFD) and the Task Force on Climate-related Financial Disclosures (TCFD) are both aiming to boost the availability and quality of data in their respective fields, creating a “reporting framework that will be incorporated into the disclosure standards of existing sustainability standards bodies, and also written into national law by governments”.
A Climate Data Steering Committee has also been set up to “advise on the design of a unified global open climate data platform that will be available to the market, regulators, climate scientists and civil society”.
Ultimately, an Asian version of the European Single Access Point – intended to be a unified public portal for “sustainability-related information about EU companies and investment products” – may be a long way off but nevertheless offers stakeholders cause for ambition.
“Initiatives such as the European Single Access Point […] will be useful,” said Temasek’s Lee. “Separately, tech solutions that aim to simplify the ESG disclosure process by converting data inputs into different reporting frameworks as required under different jurisdictions and purposes also look extremely promising.”