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Solving the ESG Data Challenge

ESG

By Mackenzie Hargrave  |  August 31, 2020

Since 2018, investments labeled as ESG or sustainable account for more than $30 trillion in global assets under management (AUM). Investors saw a 34% increase in ESG investing from 2016 to 2018 alone.

Despite the ongoing rise in ESG investments and attention given to the topic, investors are still plagued by the challenge of finding the right data providers. While the lack of standardization in ESG data and investing offers a challenge, it also allows investors to customize their application of ESG data and uncover differentiated approaches that add value in the space. The flexibility offered to investors is mirrored by the deluge of ESG data providers in the market as each offers a unique approach to classifying and quantifying ESG.

Each investor’s unique ESG implementation should inform the data sources used. However, the relationship between an investor’s approach to ESG and the appropriate data sources remains murky and variable.

The Rise of ESG Investing

According to the Global Sustainable Investment Alliance (GSIA), professionally-managed assets labeled as ESG or sustainable accounted for over 30 trillion globally at the start of 2018. This figure has seen a compound average growth rate of nearly 14% since 2014.

European asset managers have been the first to embrace ESG investing, accounting for over 50% of the assets following an ESG mandate globally in 2016. However, ESG investing has spread to other regions as well; it has become a globally recognized investment approach. As of 2018, ESG investments have represented more than 50% of all professionally-managed assets in Canada, Australia, New Zealand, almost 26% of assets in the U.S., and 18% in Japan (Exhibit 1). Japan saw the largest growth in assets from 2016 to 2018 with a 307% increase from .47 billion to over 2 billion USD in AUM.

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As more firms consider how to incorporate ESG into their workflows, they are faced with the challenge of determining which sources of ESG information best align with their investment approach. Regardless of firm type, size, and mandate, selecting ESG data is especially difficult because it is a nuanced and evolving space that does not have a single, definitive set of standards for how and what information should be measured and reported. There even lacks consensus as to what to call it. Is ESG the same as socially responsible investing (SRI), sustainable investing, and responsible investing? Some will make a distinction between each, while others will group them.

Considerations for Selecting ESG Data   

The lack of agreement on what criteria should be considered in ESG analysis and what constitutes an ESG portfolio can be attributed, in part, to the lack of regulation in the space—although the EU is trying to tackle this problem. In lieu of mandatory reporting requirements, multiple organizations have formed voluntary frameworks for how corporations can report on ESG and how the investment community can incorporate it. However, the growth of standard-setting organizations has led to a lack of consistency and ultimately resulted in the emergence of numerous data providers attempting to meet a wide range of ever-evolving demands. Each of these vendors takes a unique approach using a vast array of sources and proprietary ESG frameworks, leading to low correlations between ESG ratings across vendors.

While the lack of consistency of data on the market can seem overwhelming, it is essential to understand the differences between vendors and establish a flexible framework for evaluating them. Each investor’s ESG goals should guide their ESG data selection process. As there is no singular approach to ESG investing, there is also no one-size-fits-all data provider. In some cases, sources with expertise in different areas will need to be combined; in others, one product will provide all the necessary information.

Regardless of the number of sources used, ESG data is only one component of the investment process—it is never used in isolation and always needs to be linked to financial reports, broker estimates, pricing, and more. As space evolves, investors will need to maintain the flexibility to adjust their ESG strategy and, in turn, the ESG data they use while maintaining seamless connectivity to all data sources supporting the investment process.

Read more in the eBook, Solving the ESG Data Challenge: A Transparent Framework for Leveraging Connected Content to Simplify ESG Vendor Selection, Evaluation, and Data Integration.

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Mackenzie Hargrave

Specialist, Content & Technology Strategy

Ms. Mackenzie Hargrave is a specialist within the Content and Technology Solutions group at FactSet. In this role, she focuses on the data integration and analysis of third-party data providers offered on the Open:FactSet Marketplace. She and her colleagues aim to reduce the burden associated with evaluating and integrating new content by solving for common challenges such as symbology reconciliation, and accelerating the discovery process by exposing detailed analysis and sample code. Ms. Hargrave earned a B.S. in environmental economics from Colgate University.

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