Building a robust ESG data infrastructure: cautiously optimistic

The capital markets play a crucial role in allocating capital across competing uses. To go about this thoughtfully and fact-based, investors carefully select and use data to assess the financial, environmental, social, and governance (ESG) aspects of the investment opportunities they consider.

ESG data – more insights, but also more complexity

ESG data are a significant multiple of financial data and are more complex. As such, they are more challenging to collect, validate, assure, and standardize. Take, for example, the topic of #biodiversity. There are multiple drivers for biodiversity loss, such as #deforestation, soil degradation, and environmental pollution. Moreover, natural ecosystems have a complicated structure and are characterized by habitat heterogeneity. A combination of metrics needs to be used to monitor biodiversity loss related to the condition of ecosystems and species populations.

The availability of ESG data is a major improvement, as documented in a March 2023 study from the United Nations Environment Program (“Measuring Progress: Water-related ecosystems and the SDGs”). According to this report, global data availability for environment-related SDG indicators increased to 59% in 2022, from 42% in 2020 and 34% in 2018, with improvements across regions and most SDGs.

Investors deal with #ESG data's complexity by building their knowledge base and leveraging third-party data, analytics, and technology solutions. Irrespective of where investment managers are on their journey, it is always helpful to be clear about their use case. Are ESG data used to:

1. Pursue long-term financial value creation
2. Identify economic activities, products & services that help address pressing environmental and social challenges
3. Discover engagement opportunities and guide stewardship activity
4. or a combination of these?

Purpose as a means to building a robust ESG data infrastructure

Clarity around purpose is essential. According to the “PRI in a Changing World signatory consultation” undertaken by the UN PRI in 2022/2023, the interpretations of UN PRI signatories “of responsible investment vary based on numerous factors – including individual mandates and geographic location.”

Setting and prioritizing objectives is vital in building a robust ESG data infrastructure. The purpose informs the approach, such as

• whether to emphasize #financial materiality or #impact materiality;
• whether to focus on firm operations or also on the products & services;
• how to aggregate data across different variables;
• whether to contextualize data concerning social norms and scientifically-determined thresholds & capacities;
• whether to assess both negative and positive impacts and how to net opposing effects.

A mixed picture of ESG data availability and quality

The good news is that new ways of collecting, presenting, and delivering data have emerged. At the same time, there has been a substantial increase in the amount and type of raw data collected and in the number of calculated indicators, ratings, scores, and signals. However, the rise in ESG data availability has yet to come with an across-the-board improvement in data quality. There are a several hurdles to overcome in putting together a high-quality ESG data set, such as:

1. reported company data is fragmented, non-standardized, and often not subject to audit;
2. data values for the same variable and entity may differ across data sources;
3. the data coverage may be incomplete across a universe of issuers.

While exercising caution remains essential, ongoing improvements have been made in selecting and applying ESG data. ?The variables for which multiple data sources are increasing can help identify a possible range for the respective value. Where data is company reported, an increasing number of reporting companies allows comparisons across appropriate sets of peers, which helps identify outliers for further investigation. Moreover, digitization and advances in IT continually improve data collection, monitoring, and analysis. Additionally, an increased focus by regulators and standard setters on setting sustainability disclosure standards and defining best practices provides a major push for expanding ESG data coverage and quality.

Dealing with E and S data – the new normal?

Investors are becoming more used to dealing with ESG data. The global financial crisis in 2008 was widely linked to shortcomings in corporate governance. As a result, corporate governance has become an essential consideration for investors. Furthermore, becoming more precise, as the world begins to face the repercussions of climate change and geopolitical volatility, is how the environmental and social aspects affect financial valuations and economic growth and well-being.

There is underway a mindset change for a growing number of investors. Active integration of ESG data and sustainability considerations into the investment decision making process makes a lot of business sense.

According to “The New Nature Economy Report” (a 2020 study by the World Economic Forum in collaboration with PWC), more than half of the world’s total GDP is moderately or highly dependent on the environment. Jeopardizing the sustainability of the services provided by nature jeopardizes portfolio returns.