The growing importance of ESG to the financial system was reflected this year in a greater push among investors and asset managers to address challenges in the data and reporting environment.
Several end-of-year snapshots of the ESG sector paint a picture of greater engagement by the financial community in the sources and quality of the data on which they make decisions on investments, regulatory compliance and a widening range of other strategic activities.
But the reports by EY, Russell Investments and Clarity AI also show that issues that have long troubled the industry remain – the paucity of data reported by companies, among them – while more fundamental issues, such as data quality and trust in reported data, are beginning to weigh on institutions’ minds.Potentially the most troubling findings come from business services giant EY, which said a disconnect between investors and the companies in which they invest had become apparent. In its 2022 Global Corporate Reporting and Institutional Investor Survey, EY said that almost four-fifths of investors surveyed think that the companies they back should invest according to long-term ESG considerations. However, the finance leaders of just over half of the companies agreed.
The chasm dividing attitudes was reflected in the data offered by companies. The report also said that almost three-quarters of investors surveyed believed companies had failed to create “enhanced reporting” that combines ESG with financial data, something asset managers feel is crucial.
The result has been a breakdown in trust between investors and companies that could prove catastrophic to the ESG project.
“This disconnect could potentially undermine the smooth running of capital markets, the collective battle against threats such as climate change, and the trust that is necessary between a company and its stakeholders, including customers, employees and communities,” the report stated.
EY surveyed 1,040 senior finance leaders at reporting companies and 320 institutional investors.
Old Problems
A paucity of ESG data and an absence of standardised reporting frameworks continue to trouble asset managers, a fact that is all the more relevant given that regulators are increasing their oversight of sustainability markets.
In Russell Investments’ 2022 Annual ESG Manager Survey, respondents said that while data sources had broadened and resources dedicated to ESG processes within firms had expanded, there was only limited progress on some issues that had dogged them for many years.
A mixed response to queries on how prepared asset managers were for changes in European Union regulations – new obligations under the Markets in Financial Instruments Directive (MiFID II) and preparations for greater stringency in the Sustainable Finance Disclosures Regulation (SFDR) – were attributed in part the difficulty in getting the right data.
Nevertheless, the survey found that more asset managers believe ESG factors are worth taking into account for investment and risk management decisions. Further, standardisation of reporting frameworks, while still fragmented and difficult to navigate, had improved with climate disclosures coalescing around the guidelines of the Taskforce on Climate-related Financial Disclosures (TCFD).
Reliability Worries
Data quality and reliability has also come under scrutiny and analysis by technology company Clarity AI found wide discrepancies in climate data reported by different vendors on the same companies.
The study found reliability issues in 42 per cent of the datapoints presented by three leading unnamed data providers. It said severe discrepancies – in this case, a 20 per cent variation in reported data between the providers – were present in 13 per cent of the datasets.
The analysis found that most of the variance was the result of human error in processing the data, most significantly in adding category values. Inconsistent reporting boundaries and incomplete disclosure were also cited as causes.
The findings bore out the need for financial institutions to exercise caution when seeking a data vendor, the report stated.
“These discrepancies in 13 per cent of the data is a significant percentage and highlights the valid trepidations that investors have when selecting a data provider.”
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