Some asset managers and financial firms are paying as much as four times more than their peers for the same ESG data, according to research that underlines the immaturity of the market for sustainability information.
The huge disparities in pricing for data, ratings and indexes emerged in a survey that also found buy-side and sell-side firms alike are eschewing research for raw data as they bolster their own in-house ESG analytics capabilities.
The survey by market data and research comparison firm Substantive Research shows that the data and technology market is still in a state of early development and yet to find its feet. Pricing discrepancies appear to be partly a by-product of the race to buy ever greater volumes of ESG and the destabilising effects that come with an absence of harmonised global reporting standards. However, Substantive Research’s head of market data and ESG analytics, Czarina Reinante, said the emergence of start-ups that provide specialist ESG datasets appear to be behind much of the price divergence.“What the data tells me is that smaller vendors are mimicking the pricing structure of the bigger vendors,” Reinante told ESG Insight. “They’re more confident in the fact that they have the data quality they provide to clients, and that’s why they think they can price the same as the large data vendors.”
Growing Market
Substantive Research saw a need to study the discrepancies as it researched the cost of market data for its financial clients. The ESG data market is growing fast, and prices are rising with it. EY estimates that vendors pulled in about US$1.3 billion in revenue last year and other forecasters see that growing to $5bn by next year. While investor demand is undoubtedly driving the market, the expansion of regulations is adding fuel to the fire.
Reinante said there was no evidence of sharp practices in the market. Nevertheless some vendors, especially start-ups selling niche ESG datasets, felt able to charge a premium because the market hadn’t yet found a price level for ESG data or data products. She also has no doubt that vendor claims about their data quality is justified – new entrants can’t afford to make unsubstantiated comments about their services when they are trying to build market share.
Until ESG data becomes commoditised and the return on investment of that data is known, wide price differentials are likely to persist. That means the market is still ripe for start-ups. Survey data bears that out; it found that consolidation has already gripped the market, with 11 per cent of the start-ups among the vendors monitored by Substantive Research having been acquired in the past 18 months.
Client feedback also suggests that there are more opportunities for start-ups that specialise. The large “generalist” vendors – which account for a third of those on Substantive Research’s database – don’t have the economies of scale to provide data on factors that are difficult to assess. That’s especially true of topics that fall under the “social’ pillar, such as human rights policies.
“A couple of clients tell us that some of the larger providers’ data is very generic, and it’s hard to quantify different things because they use different metrics,” she said. “So clients have looked to smaller providers for specific things rather than the generalists.”
Entry Barrier
Substantive Research questioned 40 large European and American buy-side clients with total assets under management (AUM) of $17 trillion in their study and 20 sell-side firms with $20tn AUM.
Inconsistencies within different parts of the market are also prevalent, the study found. For instance customers of smaller data providers could be paying more than three times the price of their peers for the same products.
Existing data contracts may also be keeping prices artificially higher among smaller vendors by raising the market’s barrier of entry for them, Reinante said. Financial firms that have deals with one large vendor for other sorts of market data and products my prefer to remain with them and simply add ESG data to their packages.
“It harder to onboard a new start-up and go through all the legal requirements of checking the data quality and checking the credibility of that data than it is to just say, ‘add that on for us’,” she said.
More AI
The survey found other dynamic aspects of the ESG data market, including that 42 per cent of providers are now using artificial intelligence in their products, mostly to help with data cleansing and to accelerate data ingestion.
Further, financial firms are moving away from buying research and instead shifting their budgets to market data. While ESG accounts for just 1 per cent of research spend, it claims 10 per cent of market data expenditure.
The reason, Reinantes surmises, is that both the buy- and sell-side are building up their own sustainability capabilities. The reason for that could be to do with the difficulty of basing portfolio and risk assessments on ratings, the variety of mitigates against making accurate comparisons between issuers and assets.
“They want to be able to look at the underlying data, have their own metrics, so that they can compare the data that they have and be able to create their own analyses,” she said, forecasting that eventually, more firms will abandon ratings for raw data.
“A lot of people have acknowledged the fact that there’s so many different moving parts to ESG that it’s hard to just put a single number on it,” she said. “So while ESG ratings are popular now, because it’s the easiest way to quantify how to include ESG within the investment management process, the market probably will deviate from just one number.”
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