Beware the wild world of ESG data

Investors are increasingly focusing on the sustainability of companies and funds as part of their investment process. by blackrock

BLACK
CEO Larry Fink has led the charge: “We focus on sustainability not because we’re environmentalists, but because we’re capitalists,” he recently wrote.

All kinds of sustainability-focused ESG funds are suddenly springing up, with over $1 trillion now invested in this format.

But the push goes far beyond the investment format of ESG funds: to the general public, including stakeholders such as consumers, investors and employees, who want to know how companies compare against sustainability criteria.

It is not enough for companies to say they are sustainable, they have to prove it. But ESG data is sparse and reporting frameworks woefully inconsistent.

In a recent study published by the University of Zurich titled “Aggregating Confusion: The Divergence of ESG Ratings,” the authors decomposed the divergence of ESG ratings from six leading rating agencies into three sources: different scope of categories, different measurement of the categories and different weights of the categories. They found that the ESG ratings differed substantially (the average correlation between the ratings on average is only 0.54). In addition, they detected a “rater effect” where a rater’s overall view of a company influenced the evaluation of specific categories. They concluded that the ambiguity around ESG ratings represents a challenge for decision makers trying to contribute to an environmentally sustainable and socially just economy.

Understandably, in this environment, companies are struggling to find ways to collect and aggregate sustainability data for their stakeholders. As an information point, MSC

SOUTH CAROLINA

MSCI
I have indicated that sustainability is their fastest growing business segment. Sustainability software is experiencing a boom.

Purchase of data platforms it is an approach that large companies are taking to help meet their sustainability data needs. In June 2021, JP Morgan bought ESG startup OpenInvest, followed by Blackstone

BX
acquisition of Sphera sustainability software for $1.4 billion a few months later. And so far this year, IBM

IBM
acquired environmental data startup Envizi, and SAP launched several new products that enhance its sustainability capabilities.

We also see many companies. build your own data platforms. Some asset managers, faced with the dual challenge of their company’s sustainability footprint and the sustainability of their investment portfolio, have chosen to develop their own internal measurement of their company’s carbon footprint using government data and then purchase credits of carbon. This seems like a practical initial approach at the company level, allowing time to adapt to the changing environment. Next, they turn to their investment portfolios.

For asset managers, developing an approach to their investment portfolios can be more problematic, as the complexity increases significantly from public to private. An in-house approach to evaluating portfolios can be a temporary solution, as clients often require independent verification of the methodology. And there is also the considerable cost of data and the likely cost of having to redesign the internal approach to meet evolving global standards. So asset managers look externally:

me about him public security hand, many are turning to outside sources. Arabesque, Covalence, Ethos, Inrate, Sustainalytics, and Goby are just a few of the companies that offer comprehensive ESG data services. Each of these companies has its own technique for assessing ESG aspects, rating methodology and risk analysis tools. ESG data companies often have good credentials, with impressive brochures touting “thousands of data sources,” but the underlying methodologies for rankings can seem lax in this rapidly evolving space.

  • As an example, an asset manager might engage an ESG data services firm to rate a portfolio of stocks that a client has applied for as meeting twelve of the seventeen United Nations Sustainable Development Goals, including “Emissions” and ” Use of resources” in Environment, “Diversity”. ” and “Labor Rights” in Social, and “Business Ethics” and “Capital Structure” in Governance. The data services company will provide a score for each metric for each stock in the portfolio, with an average score, and the asset manager may choose to sell the lowest rated stock.

II. About him Private security On the other hand, the data is even more problematic.

  • In a leading development, competitors come together to cooperate in creating benchmark standards in the Data Convergence Project (DCP) led by CalPERS, Carlyle, and the Boston Consulting Group.
  • DCP focuses on private company data in the underlying portfolio companies and is collecting information such as Scope 1, Scope 2 and Scope 3 emissions, as well as statistics on onboard diversity and employee turnover.

ESG protocols are neither well defined nor well regulated. Can we collect accurate and consistent data to develop information for good environmental, social and corporate governance?

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