ESG data and scores are growing in importance as companies put it to wider use within their enterprises, beyond regulatory requirements.
As well as being the cornerstone of meeting reporting regulations and guiding investors on capital allocation decisions, the data is increasingly being used in risk management and in setting business strategies, according to S&P Global. The ratings giant also said that engagement with corporates on their ESG reporting strategy and the growth of tightly focused ESG indexing is helping to yield more data.
“What we’re seeing now is a shift in perception of how an ESG score potentially could be used,” Manjit Jus, Managing Director and Global Head of ESG Research and Data at S&P’s Sustainable1 unit said during a recent webinar. “ESG scores are no longer this standalone, one-size-fits-all concept… it’s changing because increasingly it’s being seen as the sum of many different parts that are relevant and usable in their own right.”
Demand for data is growing as investment into sustainable assets surges. Funds flowing into ESG-linked ETFs alone grew from US$170 billion in 2020, to $430 billion last year, according to S&P Dow Jones Index Managing Director, Global Head of ESG Indices Jaspreet Duhra. Deloitte estimates that ESG-securities will account for more than half of all assets by 2025 and be valued at roughly $35 trillion.
At the same time regulators are beginning to get a grasp of ESG disclosures and are putting in place directives for corporates to follow, adding to the pool of information and putting pressure on data providers to feed it to asset managers.
Strategy and Risk-Management
As companies and financial institutions buy in more data, they are making broader use of it. Executives are utilising ESG scores and data to shape their medium- and long-term strategies for everything from “product to procurement to HR”, said James McMahon, Chief Executive and co-founder of The Climate Service, a climate-risk calculator that S&P acquired earlier this month.
ESG information is also informing risk calculations for investments and operations, especially in infrastructure and real estate, in order to improve their risk-adjusted returns.
“This makes sense since all business functions operate in the context of the weather and how it changes, that is to say, the changing climate,” McMahon said.
S&P predicts that the volume of available data will grow as companies and financial institutions become more aware of their regulatory obligations and client demands.
That’s especially the case in niche sectors, emerging markets and private companies, which will all yield more intel as a result of engagement by asset managers and the proliferation of ESG-linked indexes. This will incentivise corporates to gather their own ESG data, said Jus.
“We found that involving the companies you’re researching helps not only you but also the challenge of collecting data,” he said. “That helps us become better in terms of asking the right questions. At the same time involving companies and challenging them … helps them think about things that they may have thought about, but haven’t maybe had the internal buy-in to really discuss more formally.”
Index Exposure
ESG indexing is also helping to extend the pool of data available. While ESG-linked indexes have been around or two decades, their growth in the past few years has seen them narrow their focus as investors have sought funds more specific mandates.
That’s helped open up the ESG landscape by exposing investors to a wider variety of markets as the indexes have targeted more specialised sectors and smaller regions, said Duhra.
“As we move more into emerging markets one of the challenges is around the data coverage – we’re concerned about what companies are disclosing and about the quality of the exposure,” she said.
“This is where we’re leaning on our research providers and partners to validate that data to give assurance about the quality of disclosures and potentially fill those (data) gaps.”
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