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Solving the ESG Data Challenge

ESG

By Mackenzie Hargrave  |  November 16, 2021

As of 2020, environmental, social, and governance (ESG) or sustainable investment strategies reached more than $35.3 trillion in global assets under management (AUM) across the United States, Canada, Japan, Australasia, and Europe. Investors saw a 15% increase in ESG investing from 2018 to 2020 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. This is evident now more than ever as both ESG regulatory and industry standards evolve to address rising concerns such as greenwashing. While the lack of standardization in ESG data and investing presents 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.

Naturally, 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 $35.3 trillion globally in 2020. This figure has grown 55% since 2016.

European asset managers have been the first to embrace ESG investing, accounting for over 50% of the assets following an ESG global mandate in 2016. They are also now among the first to align their practices with new ESG regulatory requirements that were developed as part of the European Union (EU) Action Plan. However, ESG investing has spread to other regions as well, becoming a globally recognized investment approach with sustainable investments accounting for 35% of AUM across regions surveyed in 2020. As of 2020, ESG investments have represented more than 60% of all professionally managed assets in Canada, 33% of assets in the U.S., and 24% in Japan (Exhibit 1).

proportion-of-sustainable-investing-assets-relative-to-total-managed-assets

snapshot-global-sustainable-investing-assetsJapan saw the largest growth in assets from 2016 to 2020 with a 168% compound annual growth rate, increasing from $474 billion to over $2,874 billion in AUM (Exhibit 2).

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 historically has not had a definitive set of standards, leaving firms to make their own implementation and reporting decisions. With regional and global initiatives progressing towards a global sustainable reporting framework, investment firms must keep a close eye and adapt their implementation to the changing standards.

Considerations for Selecting ESG Data   

The lack of agreement on what criteria should be considered in ESG analysis and what constitutes an ESG portfolio is being addressed through regulation and the incorporation of voluntary frameworks (e.g., the Task Force on Climate-Related Financial Disclosures (TCFD)) into regulatory frameworks. However, the multiplicity 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 possible to clarify differences between vendors and develop a 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 the 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.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Mackenzie Hargrave

VP, Content & Technology Strategy

Ms. Mackenzie Hargrave is Vice President, Product Strategy 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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