A mushrooming of the ESG data market, growing demand for sustainability investment insights and increasing regulation is making the task of data integration harder for financial institutions.
The sheer volume of available ESG data, the increasing variety of formats in which it’s disclosed and the growing number of vendors selling it is forcing financial firms to reassess their needs and strategies, according to experts. The snowballing effect of more, and more varied, data is making it harder for firms to keep their data in order, maintain linkages between datasets and distribute it effectively within their enterprises.
At stake is the efficient running of their portfolio and risk management models, the effectiveness of their due diligence and regulatory compliance processes and a growing risk of mistakes that can lead to accusations of greenwashing.
“It used to be the case that we saw many prospects and clients say they are going to try and manage with one ESG data provider to keep costs low – because they considered it relatively pricey data – but we hardly see that anymore,” Volker Lainer, vice-president of product management and regulatory affairs at data integration specialist GoldenSource told ESG Insight. “We now see the three-, four-, five-data provider approach, and that is posing a big challenge, requiring data harmonization and a smart ESG system design.”
ESG data is of greatest value when it can be linked to other data sources, such as reference, price and research data, to enable financial institutions to establish the best assets to buy or sell and the best ways to assess the sustainability of their holdings. Connections also need to be created between the financial instrument’s data and that of the entity that issued the asset.
By creating those linkages, insights can also be extrapolated by analytical tools that can build portfolio and risk assessment models, as well as streamline regulatory compliance processes.
“It is only when firms are properly linking ESG data to more traditional data that they can achieve the level of coverage required to put ESG data to use in sustainability focused products and strategies,” Don Huff, global head of client services and operations for Bloomberg Data Management Services, told ESG Insight.
By its very nature, however, ESG is more difficult to integrate. The variety of formats in which it is reported and fact that vendors use different identifiers for their content means that a company’s data managers – or its outsourced data management vendor – needs to process the information before it can be fed into institutions’ portfolio management, risk management, core banking and other systems.
But the recent proliferation of data vendors and the broadening of ESG data types – including satellite imagery and geospatial data – is adding to companies’ data integration challenges.
Growing demand from end users has seen the ESG data market surge to beyond US$1.3 billion in the US alone, according to American management consultancy Opimas. The market has grown around 30 per cent annually over the past five years, it reported, which also noted that the ESG indexes sector was the fastest expanding, at around 40 per cent per year.
That’s been driven by largely by increased regulatory oversight, Opimas said. But Lainer said GoldenSource had seen growth as a result of more structural changes to companies’ perceptions of ESG data.
“They already recognise that ESG data is reference data” and they are buying more of it, he said.
The number of vendors selling ESG data has also increased as a result of greater specialisation within the market, said Martijn Groot, vice president for marketing and strategy at data management provider Alveo.
While consolidation among the big providers – notably Morningstar’s acquisition of Sustainalytics in 2020 – has seen the mega providers broaden their offerings, smaller and niche companies have also emerged, adding to the volume and variety of data that users must learn to integrate.
As well as offering climate data such as emissions and physical risk metrics, start-ups have emerged that specialise in offering data on such themes as biodiversity and net-zero transition risks, water stress, and diversity, equality and inclusivity. Among them are the UK’s NatureAlpha, which just signed a deal to provide biodiversity data to MSCI, and Net Purpose, which offers impact data to investors.
That, in part has been driven by the need to fill gaps within the ESG data record, said Groot.
“You have companies that jumped into the gap and came with their own scores, with their own estimates ranging from, for example, carbon emissions and biodiversity impact to gender pay gap,” he said. “The range of data sets has broadened and the integration task is now larger.”
As ESG has become part of the everyday language of finance, focus has intensified on the space. And it hasn’t all been positive. An anti-ESG movement among conservative politicians in the US is casting a chill over the market. Some states, encouraged by fossil fuel producers and their lobbyists, have sought to ban public investment in sustainability-themed assets or financial strategies.
With opponents wielding egregious examples of greenwashing as weapons in this battle, the importance of proper integration has deepened. That has placed emphasis on ensuring data linkages are maintained, that data is properly governed and that the single source of truth is securely protected and easily accessible.
That’s especially important when it comes to the use of estimates and scores, which are used to fill in the gaps in the data record or to offer more digestible metrics for investors. Inconsistencies between these metrics have often been seized on as reason to distrust the sustainability project.
More than ever, companies need to ensure they can trace the assumptions made in their analyses back to the raw data, Alveo’s Groot said.
“ESG is something that impacts basically every part of a business, so it’s very pervasive across business processes,” he said. “You have to get you house in order. You have to document what you are doing, whether the data comes from corporate disclosures, third-party expert opinion or is your own estimate, otherwise you might face a regulatory backlash or a PR backlash.”
While challenges may be growing, the industry is rising to meet them. Cloud-based hosting and computing is taking much of the inconsistencies out of management and making it easier to maintain the linkages that are vital to successful integration. And third-party data vendors are updating the technological infrastructure to help clients overcome the mounting hurdles.
The future is, as GoldenSource’s Lainer opines “getting less messy”.
“It all begins with a solid data model,” said Bloomberg’s Huff. “This means that firms need to build out their ESG data on the foundation of well-integrated, modelled entity, instrument, market and price data. Then, it becomes a simpler exercise to join data from multiple ESG vendors.”
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