Building a Portfolio

Navigating the ESG Data Landscape

As investor interest in environmental, social, and governance (ESG) factors continues to grow, so have the calls for ESG data that can help investors evaluate their capital decisions based not only on financial metrics but also on their measurable impact.

A recent white paper from BNY Mellon found that having too little data to measure the performance of investments outside of financial considerations remains the biggest hurdle to ESG investing growth. But that trend is starting to change.

“Overall, the market for ESG information is maturing and quality, while still imperfect, is getting better all the time,” wrote Georg Kell, founding executive director of the UN Global Compact. “And new technology based on machine learning and big data can already unlock valuable insights and offer easy ways to apply ESG data in addition to conventional financial information.”

The Importance of ESG Data

In recent years, research has suggested that some ESG investments may deliver market-rate returns. But data around the actual impact of these investments themselves has been more difficult to find. Such information is key to building the credibility of the industry as a whole, particularly for those investors who see impact investing as a values-driven strategy in addition to or above a monetary one.

Making sustainable investment decisions without standardized data is like making financial investment decisions without access to a company’s financial performance or accounting standards, write Mission Investments’ Graham Macmillan and ESG investing authority Robert Eccles in a recent Barron’s article. The piece claims that “more and better” data will allow for the entrance of even more capital into the impact investing space.

Macmillan and Eccles argue that the process of creating such data begins with stakeholder agreement on the standards and reporting infrastructure required, followed by support and enforcement by regulators. “All the tribes must work together for a common purpose: interoperable scale that aids investors, policymakers, companies, and communities alike to allocate capital for less risk and better outcomes along with risk-adjusted returns.”

Data-Related Challenges

While the pursuit of ESG data has seen progress, investors still face significant barriers to accessing the data they need. Chief among those challenges is the increasing cost of quality data. Global spending on ESG data hit more than $505 million last year, and researchers at Opimas expect it to reach $745 million by the end of next year.

Rising costs reflect the need to purchase more and different types of data from multiple sources, as well as the manpower required to make use of it. “[I]t’s a ‘heavy lift’ to hire the data scientists to handle this data,” Lisa Conner, head of client services for North America at RIMES, reportedly said at a recent panel during the North American Buy-Side Technology Summit.

In addition, the type of data that investors want is changing as more sophisticated investors enter the space and make portfolio decisions that go beyond simple screening. “Shifting to a more positive stance that puts more money into companies that score more highly based on ESG criteria like carbon output or gender diversity will require more refined numbers,” wrote Bloomberg opinion columnist Mark Gilbert.

The type of data that investors want is changing as more sophisticated investors enter the space and make portfolio decisions that go beyond simple screening.

Finally, data providers may weigh specific material factors differently when evaluating companies, creating wholly different outcomes. While there has been a shift toward a greater reliance on quantitative data, some companies also use qualitative measures, which are harder to judge against one another. For example, a company’s rating on racial diversity might factor in quantitative measures such as the makeup of its workforce or supply chain or the existence of specific diversity-focused programs, but it might also include qualitative data such as whether the company has made a commitment to maintaining or growing diversity or how employees rate the company.

A Growing Industry

With investors continuing to call for higher-quality data, there’s been a surge of new data products attempting to answer that demand. The number of ESG indices grew 60% from June 2017 to June 2018.

Investors can also now access specialized data around a variety of thematic tilts and screens, including gender equity, racial diversity, Catholic values, human rights abuses, and others. Equileap has emerged as a data provider focused specifically on gender equity metrics, while CDP provides insight on companies’ environmental impact.

As the industry puts standards in place and the best ESG data tools become indispensable, the overall quality of data products is positioned to rise. And when the availability of data becomes more widespread, impact investors at all levels may become increasingly confident in understanding whether the money they allocate to ESG investments can create a real impact.

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