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Optimism Marks ESG Data Sector but Challenges Remain

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Clean and accurate ESG data is core to financial institutions meeting their sustainability ambitions and obligations, but ensuring they have enough data in a useable form is proving a stumbling block. This, and other shortcomings of ESG data, was the subject of a fascinating conversation at last week’s A-Team Group Data Management Summit New York.

Two key issues were raised on ESG data quality, the challenges associated with the timing lag in obtaining, cleaning and using the data, and the lack of strong lineage structures within it.

In a conversation moderated by Tamara Close, founder and managing partner at Close Group Consulting, representatives from the data supply and usage side of the financial industry voiced optimism about the ESG data space, establishing that despite recent criticism from some political voices in the US, financial institutions – and in fact some of those same politicians – were not in fact rowing back on ESG. However, while market participants are working through the data and technology challenges, the ESG data industry is still far from the stage of maturity that will enable it to shake off the naysayers.

Time Lags

On data quality, the main hurdles remain standardisation and coverage. Two factors stood out for the speakers. Tom Quinn, chief operating and compliance officer at Moerus Capital Management, highlighted the challenges associated with lags in reported ESG data. He referred to a sovereign wealth fund that had divested from a US utility because of its carbon footprint.

Quinn explained that the decision had been made based on data that didn’t take account of the fact that the firm had recently set itself on an aggressive decarbonisation programme.

He argued that unless investors are in direct dialogue with companies, they can experience a serious delay in receiving critical data. Backing him up, Close explained that carbon emissions data for a company can be a year old when it’s reported and two years old by the time it’s used in scores and ratings.

Edward Grau, lead, technology and strategy advisory for North America at Luxoft, encapsulated the challenge – If your timing is off, it’s as bad as being wrong. Grau argued that the lag in reported data is exposing investors to the risk of making bad decisions because they are basing them on something that has or hasn’t yet happened.

Getting linkages right

The discussion was equally expansive on data lineage and how the poor quality of back linkages in ESG data could hamper financial institutions as they establish investment and risk mitigation strategies.

Data lineage helps users trace back to the source of information or data element they have used in making a decision or an investment recommendation. That’s especially important when decisions are made on multiple sources of information. Preserving data lineage also helps in recreating strategies for year-over-year, industry or sector comparisons, and for identifying data sources when there is a control issue.

However, Grau said that the ESG data industry was too new in the discipline to ‘even get to that level of traceability’. Andrew Foster, head of data governance Americas at Deutsche Bank, argued that it was vital to treat ESG data in the same way as other datasets to ensure that such attributes were maintained.

Infrastructure changes

The panel agreed that this was a ‘really good time in the industry’, with more companies integrating ESG into their board decision-making processes. This means we can expect rapid changes in the coming year as the data providers mature.

ESG data will go through the same process of maturation and acceptance as other forms of data did in the 1990s, said Close, a point echoed by Jeremy Stierwalt, partner and US head of data and analytics at Capco, who said it was incumbent on participants to ‘evangelise’ the importance of ESG in finance.

As sustainability is becoming embedded in corporate purpose and operations, boards don’t want to be blindsided by false information or to put out incorrect statements on their ESG positions, and that will put pressure on vendors to improve. Already data providers are evolving, the panel heard. They are offering broader coverage, providing more transparency by exposing underlying data elements that underpin their scores and ratings, and they are providing more granularity in datasets.

The panel said vendors were also informally agreeing a level of consistency in scores, a process that mirrors the maturation of credit rating agencies. And as regulators ‘say enough is enough’, vendors will step up merger and acquisition activities so they can provide a full range of critical ESG intel.

Grau suggested that the speed of change is so rapid that it would be foolish for firms to invest too heavily in infrastructure now. That said, Stierwalt noted the need for smaller companies to invest in ingestion technology as many don’t have these capabilities.

The overall optimistic tone was extended in a concluding comment that observed a growing understanding among boards that being ESG compliant will bring in new sources of liquidity, lower the cost of capital, and increase profitability.

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