With a growing requirement and expectation on firms to meet environmental, social and governance (ESG) standards, what do you need to know about ESG data providers?
According to ACA Group, firstly, expectations around ESG data are increasing. With investors, regulators and internal stakeholders expecting more information on a company’s ESG initiatives, asset managers are being found turning to external data providers to help them assess risks, opportunities and investment impact.
The company said, “For some asset managers, this data can be a critical part of how they attract and maintain socially conscious investors. For others that have voluntarily joined ESG frameworks or who operate in jurisdictions that require data like carbon emissions to be reported, these data providers can allow for more efficient and effective reporting.”
There are also numerous data providers with different value propositions. As of right now, there are several forms of ESG data providers in the market, each focusing on a different value proposition.
ACA defines an ESG data provider as a third-party vendor that provides an assessment of the risks, opportunities, and impacts of a company’s activities, especially those activities related to environmental, social, and governance. The specific methodologies, data outputs, benchmarking, and reporting can vary significantly from one provider to another.
“Although company-level ESG data is improving, it is still fragmented, especially for smaller companies and emerging markets. Selecting a vendor is all about the right fit – a vendor which covers issuers that match an investors investable universe, and the ability to distill disparate data to create easy to digest scoring or ratings,” ACA remarked.
ACA highlighted is also key to understand that not all companies will need a data provider. While not all businesses would benefit from an ESG data provider, companies that are actively advertising themselves as having a positive ESG impact with be expected to provide hard evidence.
“Additionally, firms that operate in jurisdictions that require carbon disclosures, are subject to regulations such as the Sustainable Finance Disclosure Regulation (SFDR), or investment diligence could certainly benefit from the data and analysis these vendors can provide,” remarked the firm.
Most notably, there are also many differences between ESG data vendors. Currently, ESG data is primarily gathered through publicly available information. Such sources can include company filings, sustainability reports, publicly available databases and news articles.
“Some ESG data providers “scrape” the web for information associated with an issuer, while some data providers engage directly with companies to collect data. Through this process, it’s important for investors to focus on how the data will be used within the firm – and what type of data is required,” quipped ACA.
Lastly, consistency is vital for an accurate comparison. “Before a firm begins the process of selecting the right ESG data provider, individuals involved in ESG decisions should outline what data they are looking to collect and identify the various use cases for the data (reporting, used within the investment process, etc.).”
ACA concluded, “Next, an investor should evaluate the coverage of various data providers against their investable universe and ensure coverage at the issuer level as well as for the key data elements they are looking to collect (not all data is available for every company). After the company has evaluated these aspects of the ESG data providers, the selection can be based on more traditional factors such as cost, contractual terms, support etc.
“It is important to work with the vendors to ensure their responses for RFPs are consistent and comparable to one another – most firms have their own unique way of describing their methodology, pricing, and other key factors.
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