Five Things to Know About ESG Data Providers
Selecting a Vendor from a Crowded Market
1. Expectations Around ESG Data Are Increasing
As investors, regulators, and internal stakeholders expect more information on a company’s environmental, social, and governance (ESG) initiatives, asset managers are increasingly turning to external data providers to help them assess the sustainability risks, opportunities, and impact of their investments. 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.
2. There Are Numerous Data Providers with Different Value Propositions
There are several types of ESG data providers in the market – each focusing on a different value proposition (e.g., providing raw ESG data, providing issuer level ESG ratings, carbon footprint calculation, private market coverage). For purposes of this discussion, an ESG data provider is 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.
3. Not All Firms Will Need a Data Provider
While not all firms would benefit from an ESG data provider – and for some smaller firms, the cost and effort associated with selecting and onboarding a vendor may make not worth the effort – companies that are actively advertising themselves as having a positive environmental or social impact will be expected to support those claims with 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.
4. There Are Key Differences in ESG Data Vendors
ESG Data is primarily gathered through publicly available information. There are several sources where this data can come from – company filings (10k, 10q), sustainability reports, news articles, publicly available databases (i.e., Litigation, environmental databases, etc.). 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 (quantitative vs qualitative, etc.).
5. Consistency Is Necessary 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.). 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.
A helpful tool to ensure providers are responding to questions in a consistent manner is the ACA ESG Vendor Questionnaire which can be sent directly to each vendor that is considered for completion.
How We Help
The ESG landscape is evolving at a rapid pace and requires additional resources to meet investor and regulatory expectations.
Our dedicated ESG advisory and analytics practice helps firms of all sizes develop and monitor ESG programs to mitigate risk, make informed choices, grow profitably and sustainably, and combat greenwashing in the process.
ACA's ESG data & analytics solution, Ethos ESG, ACA’s new ESG platform will help our clients understand and design metrics programs according to client/investor preferences, track those metrics and report on progress over time, and advise staff on compliance around evolving ESG regulations.
Learn more about our integrated tech and advisory ESG practice here.