Two recent developments indicate the priority importance of, and increasing attention to, ESG data and technology:
- MSCI (a provider of decision support tools and services for the global investment community) recently listed "The ESG Data Deluge" as one of its five ESG Trends for 2021. MSCI recognizes that the voluntary disclosure of ESG data by companies is increasing at a time when mandatory disclosure regulations are taking shape around the world, creating the "perfect storm" for a flood of company-related ESG data.
- Meanwhile, ESMA (the EU securities regulator) recently called for the supervision and regulation of the ESG ratings and assessment industry, which relies on a range of ESG inputs, including company disclosures, to rate and analyze the sustainability performance of companies. These ratings and analyses are in turn used by a range of market participants as ESG data inputs for a variety of purposes.
As a flood of ESG data converges with a call for increased regulation by a critical securities regulator, data issues are likely to stay at the forefront of the ESG discussion for the foreseeable future. In this Blog Post, we highlight the significant commercial interest in ESG data and tech, as well as how some deficiencies in ESG data have led to increased regulatory attention.
The Current Landscape
Companies can't "do ESG" in a vacuum, nor can investors. Data users must be able to analyze and compare ESG information in order to determine how well companies are performing against their peers, as well as for lending and investment purposes. The need for data has created numerous startups focused on ESG data collection, ratings and analysis, as well as noteworthy M&A activity involving established firms. Further, artificial intelligence and new, different types of data will increasingly support compliance with existing and new ESG regulations, creating even more opportunities for innovation.
Continued Commercial Interest
It is difficult to overstate the commercial interest in ESG data. Earlier this year, BlackRock bought a stake in the sustainability platform Clarity AI. This investment is the latest step for BlackRock's Aladdin platform, which continues to invest in its sustainability capabilities. Last year, it added 1,200 sustainability metrics and established data partnerships to help investors understand ESG and physical climate risks and opportunities.
Elsewhere, according to S&P Global:
"Several big financial companies have looked to build out their ESG data offerings through M&A in recent years. Moody's Corp. struck three separate ESG deals in 2019, including acquisitions of [ESG research and services firm] Vigeo Eiris, [climate data, intelligence and analysis firm] Four Twenty Seven Inc. and a minority stake in [consultancy and research firm] SynTao Green Finance. Institutional Shareholder Services Inc., the U.S.-based proxy advisory giant, has purchased four separate ESG data and research providers since 2015. And MSCI Inc. and S&P Global Inc. have each announced several ESG-related purchases of their own."
The Shortcomings of ESG Data and Tech
Given this acquisitive interest from established market players, it is not surprising that there hundreds of different ESG data providers with as many unique approaches. For example, ESG Tech describes itself as solving the "scalability of KPI-linked financial products offered by financial institutions." They do this by "advancing the acquisition and verification process of ESG material disclosure of corporate clients, underlying assets, for corporate banking, fixed income and alternative investments." Datamaran describes itself as "the market leader in external risk management" with an approach "based on evidence and facts, not opinions." Datamaran's "technology supports a structured business process for external risk identification and monitoring, so you make confident decisions now and for the future."
These are but two examples in an increasingly crowded marketplace. But how consistent is the ESG data generated by different firms? Unlike financial data, ESG disclosure currently does not have generally-accepted principles, which leads to problems of comparability and decision-usefulness across data from different service providers and companies.
Indeed, according to some, ESG data analysis still needs significant improvement. For example, Boston-based PanAgora Asset Management still collects most of its own ESG data. When the firm does buy data from third parties, it collects the underlying information in its raw format in order to avoid any "pre-bottled scores". PanAgora doesn't want to invest in ideas that are "offered up to everybody". As noted by Curt Custard, CIO at Newton Investment Management, "Data and the quality of it is very important . . . . In the asset management space, we are used to robust data infrastructure and reporting, but now it just doesn't exist for ESG." Further, in the words of MSCI, "new regulations are taking effect and voluntary reporting standards are becoming mandatory in some countries, and these requirements are putting a lot more pressure on your investors".
Increased Regulatory Scrutiny
As regulators require the disclosure of more ESG information from more companies, the ability to scrutinize this data will improve. It will then become increasingly easier to identify the inconsistencies and non sequiturs that investors already find in disclosures. Amidst this backdrop, additional regulatory responses are likely to follow.
ESMA's statement on the need to regulate ESG ratings and assessment firms is indicative of potential regulatory responses to the current shortcomings of ESG data. Among other things, ESMA suggests a legislative solution that:
- develops a common legal definition for an "ESG rating";
- requires registration and supervision of ESG ratings agencies by public authorities;
- sets out specific product requirements applicable to ESG ratings and assessments; and
- ensures that larger, systemic entities are subject to more robust requirements.
Whether or not the European Commission moves forward with a legislative initiative in line with ESMA's proposal, regulators around the world may take note of this approach. As the flood of ESG data continues into the future, surely we can expect regulators to follow ESMA's lead and adopt new regulation around this increasingly valuable commodity?
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