ESG data quality remains the biggest hindrance to buy-side financial institutions’ sustainability programmes, according to a new survey, which found low satisfaction rates among a range of data types.
Just a quarter of 30 senior executives questioned on their ESG practices by sustainability research firm Verdantix said they thought the quality of ESG data offered by credit rating companies was high. Only 3 per cent gave a good review of sentiment data derived from artificial intelligence software, such as natural language processing (NLP) and machine learning.
And about a third have good impressions of geo-spatial data, often used in assessments of location-focused assets such as municipal bonds. Nevertheless, 47 per cent said the quality of such data was poor.
While financial institutions are buying ever more ESG data from vendors and other sources, there remain shortcomings that could prove damaging for firms as investor demands for sustainable investments and risk management processes rises. It may also be costly as regulators begin imposing reporting and disclosure rules on them.
“This study shows the concern on the buy-side about the quality of ESG data remains. It seems obvious that the stumbling block of sustainable finance, as well as its success, depends very heavily on extra-financial data, its quality and its availability,” said Kifaya Belkaaloul, Head of Regulatory at financial software vendor NeoXam. “The need for buy-side firms to get their data houses in order is clear when it comes to ESG investing. It is now a vital pillar of finance – and high-quality data is needed to uphold this.”
ESG data quality has long been regarded as a sticking point in the efficient use of private investment to bring about environmental and social change. Consumers complain that the raw information is often unstructured and needs extensive mastering and other treatments to be useable, comparable and ready for integration with other traditional datasets. An absence of global standards on what firms should disclose – and, indeed, whether they even should – has also left holes in the ESG performance data record.
While the Verdantix survey, which took in the views of executives at companies with more than US$1 trillion under management, found there is strong demand for good quality ESG data, firms are clamouring also for good data management processes and technology. It found that 40 per cent of buy-side respondents said a holistic ESG portfolio management solution is vital to their needs. And about two-thirds said climate change risk analytics are also crucial.
Verdantix Research Director for ESG and Sustainability, Kim Knickle, said the message from the survey was that data provided by vendors was regarded as being variable in quality, a situation that needs to be remedied.
“There is clear demand for better quality data, increased transparency around methodologies, and a greater degree of standardisation.”
The survey echoes the findings of a similar, broader, study conducted by ESG software provider Benchmark Digital Partners, which found that investors were dissatisfied with the performance data they were being offered to make capital allocation decisions.
A recent report on the Benchmark survey of 770 investment decision-makers late last year found 69 per cent – including 81 per cent of the institutional investor respondents – said they wanted “investment-grade company ESG data is timely, accurate, complete, auditable, and reliable”. Nevertheless, only half said the quality of the company environment data they received needed “significant improvement”.
Benchmark Chief Executive R Mukund wrote in a media report this week that the need for good quality data was vital because it “upholds the whole sustainable finance edifice”.
“Without high-quality company ESG performance data, investors can do little more than infer whether their capital is achieving intended ESG outcomes,” he wrote in Forbes.
Data aggregator SIX Group said many ESG data-quality short comings could be solved by ensuring its is adequately linked to core reference data.
“Data becomes useful when seen through the lens of reference data, and the same is true for ESG investments,” said Marion Leslie, Head Financial Information. “To date, the focus has been on historically reported ESG data, but this does not help to understand current footprints and future trends. Real-time data, analytics and using technology to create insights will help with transparency around sustainability.
“The market is dealing with a complex regulatory framework, as well as fragmented data and technology,” Leslie added. “Overcoming this with consolidated data in standardised formats will ensure regulatory compliance, enable greater insight into ESG profiles and the suitability of their instruments, and drive better informed decisions.”