Cross-industry solutions are emerging as ESG data providers reconsider their place in an evolving sustainability reporting landscape.
Increasingly focused on the ESG performance of their portfolios, growing investor demand for decision-useful sustainability data has been akin to throwing a lit match on a powder keg.
With an annual growth rate of 20%, the ESG data market is forecast to approach US$1 billion by the end of this year, according to a recent report by UK-based research analytics provider Substantive.
But there is too much choice, with investors often overwhelmed by the sheer diversity. It is little wonder many are struggling to source the transparent, comparable and reliable information they need to ensure companies are addressing ESG risks, impacts and opportunities.
“The ESG data landscape at the moment is terrible and very expensive,” says Daniel Klier, President of data provider Arabesque. “It’s full of mistakes, outdated and old-fashioned.”
Many investors rely on ratings, based on inputs and methodologies constructed from multiple underlying sources. But ESG ratings “vary strongly depending on the provider chosen”, according to a 2020 report by the Organisation for Economic Co-operation and Development. This can be due to different frameworks, key indicators, methodologies and qualitative judgement, the report noted.
Regulators are set to weigh in. The European Fund and Asset Management Association has called for European regulation of ESG data and ratings, and the International Organisation of Securities Commissions (IOSCO) has made recommendations to member regulators. For the former, it is expected that measures to improve ESG data and ratings won’t be introduced by the European Commission until Q1 2023 at the earliest.
Just as sustainability standards-setting bodies are now consolidating, such as the Value Reporting Foundation and Climate Disclosure Standards Board merging into the IFRS Foundation’s International Sustainability Standards Board (ISSB), data providers need to think about how they fit into a world with more streamlined and regulated data.
Further, the more aligned disclosure requirements (both mandated and voluntary) become – first around climate and, over time, broader sustainability-related metrics – the more the need for third-party vendors to re-evaluate their offering.
The ESG data landscape is changing; consolidation and collaboration are key to survival.
The network effect
Arabesque has recently co-launched the ESG Book platform to give investors and companies free access to raw ESG data. It has been brought to market in collaboration with international bodies, standards-setters and NGOs, building on the principles of the UN Global Compact.
“Think of ESG Book as a platform similar to LinkedIn,” Klier explains, highlighting its network-based approach. “Users can sign up for free, disclose for free, look at individual companies’ ESG performance for free and upload a portfolio which can then be assessed for free.”
Users will only be charged if they want to extract large amounts of information through an application programming interface (API) or if they want to use the platform at scale.
“For example, we will charge users if they want to upload 300 portfolios to run Sustainable Finance Disclosure Regulation analysis, temperature alignment analysis, and so on,” says Klier.
Partners of the platform include the International Finance Corporation, Global Reporting Initiative (GRI), HSBC and Swiss Re.
Acting as “multipliers”, each partner will invite the investors and companies they interact with to sign up to the programme, therefore expanding the scope of information available, Klier notes.
Alongside the platform launch, the partners and Arabesque called for a coordinated approach towards high-quality ESG data. ESG Book will adhere to five principles to serve as a “public good”: allowing corporates autonomy over their data; contributing to meaningful reporting through transparency; ensuring accessibility and impartiality; providing data relevant to multiple disclosure frameworks; and ensuring data can be mapped across those frameworks simultaneously over time.
ESG Book is ‘framework-neutral’, Klier explains, adding that the platform aims to provide all information that is needed, regardless of whether an entity is reporting to Sustainability Accounting Standards Board (SASB) or the GRI. Theoretically, this means that the platform will be able to integrate the data requirements of the ISSB climate standard, and subsequent sustainability standards.
“In the end, every framework is asking for the same information,” Klier says. “They want to track emissions and they want to know how many women sit on corporate boards, for example.”
ESG Book is currently invitation only but will be open to everyone from January next year.
Alexandra Mihailescu Cichon, Executive Vice President of Sales and Marketing at ESG-focused data science company RepRisk, emphasises the importance to investors, not just of sustainability information reported by companies, but also data from government agencies, NGOs or media that indicates how companies are handling ESG issues where they operate.
“Comprehensive ESG data really needs to account for both sides: what the company says and what the company is doing,” she says. “Investors can’t just look at company disclosures, because this can mask risks and can be biased.”
As company disclosures become more subject to regulation, they will become more reliable, but the investor’s need for decision-useful data is driving providers and platforms to evolve. ESG Book isn’t the only initiative demonstrating collaboration to help improve data quality and utility, points out Mihailescu Cichon, highlighting the ESG Data Convergence Project as one example.
With steering group members including PGGM, CPP Investments and the California Public Employees’ Retirement System, the project’s objective is to streamline the private equity industry’s approach to collecting and reporting ESG data. To do this, project participants have committed to reporting on a core set of six initial ESG metrics drawn from existing frameworks, including Scopes 1 and 2 emissions and board diversity.
Microsoft, Allianz, Goldman Sachs and the Net Zero Asset Owner Alliance have all joined a Linux Foundation initiative, Open Source Climate Data (OS-Climate), which aims to develop data sets and evaluation tools to funnel investment into the transition to net zero. Its data and model partners are Jupiter, Urgentem and the World Resources Institute (WRI).
The Transition Pathway Initiative (TPI) has announced plans to launch the Global Climate Transition Centre to increase the initiative’s climate assessment coverage of 10,000 companies spanning a broader range of asset classes, such as fixed income. These assessments will be free and publicly available to all investors. As an asset owner-led global initiative, the TPI aims to assess companies’ preparedness for the transition to net zero. It is currently backed by over 90 investors with a total of US$23 trillion in assets under management.
TPI has partnered with the London Stock Exchange Group, which will be providing data and funding over the next five years to help further scale the initiative’s assessment capabilities.
The Impact Management Platform was launched to improve interoperability between existing sustainability disclosure standards and impact management actions. Partners of the platform, such as the Global Impact Investing Network, Principles for Responsible Investment and GRI have made their standards and guidance accessible through the website. They will be working together to identify opportunities to consolidate their resources and, where consolidation isn’t possible, they will ensure there is cohesion.
“The Impact Management Platform, which is going to sit alongside the ISSB, really aims to address the main criticism that the ISSB is only interested in the enterprise value side of ESG reporting,” says Tim Mohin, Chief Sustainability Officer at Persefoni, a climate management and accounting platform.
The platform’s steering committee includes multilateral bodies that are also advising the ISSB, thus ensuring alignment.
The ESG data landscape is set to be shaped further by regulation – especially if the ISSB climate standard is formally adopted by regulators and legislators around the world, says Mohin.
With a big global change beginning to take place through the consolidation and increasing cohesion of different disclosure frameworks, Mohin questions whether it is the right time for data providers to come to market with distinctly proprietary solutions.
For the ISSB to cement itself as the global standards-setter for ESG disclosure, investors, data providers and companies need to be putting their weight behind it, he says, noting that they must subsequently “tamp down other competitive activities that might add to the confusion that already exists in the market”.
As regulators get ready to embrace the ISSB to increase the transparency of corporate climate risks, they are also looking to shed more light on data providers.
A joint paper outlining possible third-party data vendor standards was published by the French and Dutch regulators for financial markets – the Autorité Des Marchés Financiers and Autoriteit Financiële Markten. It proposes a regulatory framework, overseen by the European Securities and Markets Authority, which would include requirements on internal controls and governance of ESG data, such as transparency of methodologies and costs.
“If data providers really want to do a service to the market, they will [voluntarily] go public with their methodologies and ESG definitions, so then providers can try and align in some way,” says Mihailescu Cichon. RepRisk recently made its methodology publicly available on its website.
Notably, IOSCO’s recommendations for the ESG data landscape could have a global impact.
In November, it published its finalised recommendations for securities regulators to consider in their oversight of ESG ratings and data providers, following a public consultation in the summer.
The recommendations include: promoting transparency of third-party methodologies; ensuring procedures to manage conflicts of interest; improving communication channels between providers and the entities covered by ESG ratings or data products, without undermining impartiality; and improving the sustainability-related disclosures of entities subject to assessment by third-party vendors.
“IOSCO, being a global body of capital market regulators, is in a perfect position to take a stance [on] data and analytics,” says Persefoni’s Mohin. “Because this information is increasingly important, especially to financial markets, it needs a certain level of rigour.”
With IOSCO providing a lead, Mohin predicts that more securities regulators are going to be “committing to overseeing the rules of the road”.