Phase 2 – ESG data distribution and consumption

Published: 3 October 2023

5 minute read

Introduction

The landscape for ESG data is rapidly evolving. This makes it important to understand how the data is currently being used as well as how that is likely to change in future. This report examines how investors collect and use ESG data and is based on 90 interviews with investors, companies, data and rating providers, fintech solutions, consultants and academics, as well as a supplementary survey of 30 investors. We were primarily interested in how investors source ESG data and incorporate it into their investment processes, so we interviewed a diverse range of investors, of varying sizes, including active and passive managers as well as asset managers specialising in fixed income and private markets. We also spoke to asset owners and retail investors.

The report explores three elements of why and how investors get and use ESG data:

  • Motivation - What motivates investors to collect ESG data?
  • Method – How do investors collect the data?
  • Meaning – How do investors integrate ESG data into their investment processes?

Motivation

The key drivers for why investors are collecting ESG data are:

  • Portfolio construction and company analysis
  • Regulatory purposes
  • Stewardship
  • Client reporting

Challenges for investors include:

  • Data regulations being introduced for investors ahead of companies;
  • Concerns around fund labelling and accusations of greenwashing.

Method

Sources or methods for collecting ESG data are:

  • Direct – data collected from materials published by companies and from interactions between investors and companies; and
  • Indirect – data collected via third party data providers – typically investors pay for the service. This data is primarily derived from company reporting and then subject to a level of standardisation, or from other sources such as the media.

Almost all investors rely heavily on third party providers for their ESG data as it is a more time-efficient process when covering a portfolio of multiple companies. However, they also use companies’ narrative reporting to understand companies’ ESG priorities and to obtain a qualitative context for the data and metrics. Many investors state they primarily use the underlying data from the ESG ratings providers and pay limited attention to ratings, but ratings may be monitored for changes or outliers.

In processing their ESG data, many investors have ESG teams dedicated to selection of providers, aggregating data, performing own research and developing proprietary scores. Investors also perform materiality assessments to identify and focus on the most useful ESG data they expect to be relevant for a company.

Challenges for investors include:

  • Timeliness of data, as sustainability reports are not always published in conjunction with the annual report, and due to the cyclical nature of updates by data providers;
  • Lack of clarity on the methodology of the ratings and data providers;
  • Cost limiting the ability to use multiple data providers.

Meaning

How data is used will to an extent depend on the size and type of the investor. However, some commonalities in approaches to the use of ESG data include:

  • Qualitative, not quantitative – Although some investors attempt to combine financial and ESG data, or use the data to adjust discount rates when analysing companies, most investors use it as a qualitative overlay when assessing companies’ prospects;
  • Specific issues – Some investors focus on a specific ESG issue and use it to engage with companies;
  • Monitoring – many investors use ESG data to monitor companies’ performance on ESG issues over time.

Challenges which limit the degree to which ESG data is integrated within financial analysis include:

  • Quality of data due to the manual nature of data providers’ processing of company data, as well as the lack of clarity on use of estimates;
  • Volume of data risks obscuring relevant ESG issues and metrics if the annual report does not focus on what is material;
  • Jurisdictional differences in data availability and quality, particularly in emerging markets; and
  • Data gaps, particularly in social, biodiversity and water data.

What should companies do to facilitate how both investors and data providers consume data?

Understand who your audiences are and target accordingly

  • Keep the annual report as the main vehicle for reporting aimed at investors and consider whether a standalone sustainability report is more appropriate for other stakeholders.
  • Proactively engage with investors to understand which ESG issues are important to them and how they are using your reports and communications. Web analytics may be useful, and it may also be helpful to understand your largest investors’ ESG priorities and methodologies as set out on their websites.

Focus on what is relevant to your company in the annual report and provide further detail in datasheets

  • Remember that investors are getting their ESG data primarily from third party providers and are likely to use your annual report to further their understanding of your ESG risks and opportunities.
  • Focus on ESG issues specific to the company, explain your priorities and how these issues impact performance, business model and strategy within the annual report.
  • Do not obscure relevant information. Remember that investors are time-poor and considering multiple companies.
  • Use datasheets as one easy-to-find repository of a company’s ESG metrics and other information to facilitate data collection by data providers and investors’ data teams.

Ensure a coherent and interconnected narrative backs up the data

  • Ensure that the messaging of your narrative reporting correlates with the performance reflected by the data and financial reporting to avoid greenwashing and maintain credibility.

Be clear on scope of the data

  • Clarify where issues or metrics do not apply to the whole group but to a specific geography or division so that investors can understand how they relate to overall performance.

Provide clarity and consistency of location of information year-on-year

  • Signpost clearly where data on an issue or reporting against a particular framework can be found within your reporting or website, and maintain the same location year-on-year as much as possible to facilitate the process for analysts, data providers and automated data scraping tools.

Align timing of ESG reporting as much as possible to that of the annual report

  • Aim to provide ESG reporting for the same period and at the same time as the annual report.

Simplify content and keep it meaningful to facilitate data collection, including digital scraping

  • Keep content clear, with minimal use of images and annotate pie-charts/graphs.
  • Make it clear where data was assured and at what level.

Aim for comparability of data presentation

  • Provide comparative historical data, ideally up to 5 years, to assist in trend analysis.
  • Use internationally recognised standards and industry frameworks as much as possible in relation to metrics for better comparability with peers.

Prepare for further digitisation

  • Apply lessons learnt from using financial reporting digital taxonomies to ESG reporting

Questions for Boards

Effective organisations set their ESG data collection and information objectives based on what will be useful for managing the business and monitoring its overall performance, not just to meet external disclosure requirements. However, it is also helpful for boards to understand more about their major shareholders and their requirements for ESG data to better meet their disclosure needs.

Ask

  • How do we engage with investors to understand what ESG data is important to them and why?
  • What frameworks are investors using to assess us and our peers?
  • Are we engaging with the data providers our major investors use?
  • Have we reviewed the ESG ratings awarded to the company by the ratings providers and engaged where necessary? Would it be helpful to include them and add relevant commentary on our website?
  • Does our annual report help investors to understand which ESG issues are important to our company and how they relate to our performance, risks, business model and strategy?
  • Does our narrative reporting give a sense of our progress towards our ESG goals and correlate with the performance reflected in our ESG data reporting and the financial statements?
  • Is it possible to align the publication of our sustainability information and to cover the same time period as our annual report?
  • Can we put ESG data into a data sheet, which investors can easily access in one place and use to identify trends?
  • Have we considered which ESG metrics should and can be subject to external assurance?
  • Is it possible for us to map our ESG data to investor reporting requirements, such as SFDR?

Report

Documents
Name ESG data distribution and consumption
Publication date 19 July 2023
Format PDF, 953.3 KB

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