An academic study by the University of Oxford is probing the challenges associated with climate data used by financial institutions, including what constitutes good quality information.
The research by the Oxford Sustainable Finance Group (OSFG) hopes to be able to establish a baseline for ESG data quality that will provide financial firms with the tools to make better investment and climate risk-management decisions.
The Sectoral Data Quality and Integrity Project has been devised following widely reported concern among asset managers, asset owners and other parts of the financial industry that ESG data is hampering their efforts to properly allocate sustainability capital.
“It’s not comparable, it’s not consistent or it’s not actually very useful – that’s the commentary that has been coming back for quite a couple of years now,” , project lead Christophe Christiaen told ESG Insight.
The scope of the study is yet to be defined because the subject is so broad, Christiaen said. But researchers want at least to focus on a few key issues. They want to examine, with the use of real-world examples, how and why data differs between sources, across sectors and within datasets.
The study will seek to understand why there is a difference in data availability between sectors and whether some datasets are more useful than others. It will also look into the variety and usefulness of alternative data sources and the use of proxies and estimates when raw data is unavailable.
“Instead of just focusing on the problems we want to find what kind of solutions or what recommendations we can make for financial institutions to pragmatically improve either the sources of data or how to use the data,” Christiean said.
Of particular interest, the Oxford team wants to dig into the nature of data quality and what makes for bad data. They’ve decided to take such a back-to-basics approach to the subject because it’s one most commonly raised by financial institutions. Rather than simply accepting that ESG data quality can be bad, the researchers want to understand what different institutions understand data quality to mean.
Gireesh Shrimali, who heads the OSFG’s transition finance research, said data quality was a fascinating subject because institutions work to different interpretations of it.
“It’s pretty clear, there’s no clear definition of data quality – we’re trying to define what data quality means and how people are using different definitions of it and trusted data,” Shrimali told ESG Insight, adding that once a baseline description is established “we can start looking into how we can help”.
Established in 2012, the OSFG is part of the University of Oxford’s Smith School of Enterprise and Environment, which seeks to harness the knowledge within academia to offer real-world solutions to decarbonising the finance sector. It’s also associated with the UK Centre for Greening Finance and Investment, a similar cross-disciplinary initiative among British universities.
The OSFG’s other projects include the creation of a sustainable finance lab with the UK’s regulator, the Financial Conduct Authority. The project aims to forge greater links within the global financial industry to align it with the goals of environmental sustainability.
The Oxford team, which will be made up of researchers from a range of disciplines, hopes to have an initial report out in September in which it will have honed the scope of its first year’s activity. Funded by a grant from the Wells Fargo foundation, Christiean said it’s likely the study will be focused on the energy and heavy industry sectors before expanding out.
The study methodology will involve trying to recreate the sort of real-life data problem that financial institutions might encounter and then examine the causes of the challenge and solutions for them.
That will involve engaging with financial institutions to learn how they source and use data. The study will take only existing datasets used by contributing firms to examine how they differ from each other in quality, content and accessibility.
Shrimali said the team has been forced to reconstruct a real-life problem because data isn’t easily or freely available to the study – another issue that he says has implications for corporate ESG transparency and which also will be examined in the study.
“Data ideally should be available easily – it’s not,” he said. “If we want to recreate the issues, we have to do it ourselves. It’s very hard to get the data out because it’s all under confidentiality agreements.”
The study has funding to last at least a year. Shrimali is hopeful that useful answers will emerge in order to help financial institutions better direct capital towards sustainable assets and companies.
“Having that good quality data and data that people can agree on in terms of data quality is going to be very useful going forward,” he said.
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