Deep look: ESG data is being nurtured – still long from bloom

Asset managers reckon vendors could be doing more to deliver flexible solutions that meet their specific sustainability data requirements. Paul Golden speaks with a broad range of experts, including panellists of the upcoming PostTrade 360° Nordic special session on 5 September. 

Bloomberg’s March 2024 European ESG data trends survey underlined the importance of delivering better environmental, social and governance information. Almost two-thirds (63%) of respondents referred to coverage and quality issues as their main ESG data challenge.

In the same month, Germany’s integrated financial regulatory authority BaFin published a market study in which only 38% of the asset management companies surveyed considered the quality of external ESG data and ratings to be high.

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PostTrade 360° Nordic 2024, in Stockholm 4–5 September, will feature the 5 September panel session “The ESG data conundrum for asset managers”. On stage:
Cecilia Cisana (as moderator), Senior Vice President, Client Solutions, Morningstar Sustainalytics,
Isabelle Delorme, Head of Strategy and Product Expansion for Issuers, Fund Managers and Sustainable Finance, Euroclear,
Valeria Dinershteyn, Director of Sustainable Investing Client Engagement, EMEA, Northern Trust Asset Management,
Elisabet Jamal Bergstrom, Head of Sustainability and Communication, SEB Asset Management, and
Therese Niklasson, Global Head of Sustainable Investment, Newton Investment Management (BNY IM)

One of the sessions at PostTrade 360° in Stockholm last year discussed the value of quality data and this topic will also be explored by participants in the ‘ESG data conundrum for asset managers’ session at PostTrade 360° Nordic 2024.

A key discussion point from last year’s session was how to ensure that the data used is reliable and up-to-date. The views of Therese Niklasson, global head of sustainable investment at Newton Investment Management, are particularly relevant given her participation in both last year’s and this year’s sessions.

“It is important for asset managers to increase capacity for analysing data gaps and obtaining the best quality data, as well as building capacity to analyse data through in-house tools, expertise and solutions,” she says. “Likewise, it is important to implement strong data governance practices and feedback issues to vendors as part of due diligence processes.”

Cecilia Cisana, senior vice president client solutions at Morningstar Sustainalytics is also taking part in the ESG data-focused session at PostTrade 360° Nordic 2024. She reckons the main obstacles to accessing reliable, up-to-date ESG data relate to collecting vast amounts of data from a range of sources in a timely manner and validating and possibly refining the data.

Development priorities

“It takes meaningful technology, data management infrastructure as well as ESG expertise to do this well,” says Cisana.“Reporting (and sources) are multiplying and regulation and investor requirements are evolving. Service providers need to form an accurate picture of both what information is out there and the top demands of users and prioritise developments accordingly.”

Accessing reliable ESG data presents several challenges, explains Isabelle Delorme, head of strategy and product expansion for issuers, fund managers and sustainable finance at Euroclear.

“The data is frequently based on estimates rather than actual measurements,” she says. “Data requirement is often linked to specific financial products, for example use-of-proceeds instruments. Additionally, adherence to certain reporting standards can be restrictive because of their prescriptive approach.”

She adds that ESG scores and ratings tend to reduce complex issues to overly simplistic assessments and the varied methods of combining environmental, social and governance factors can result in a broad range of interpretations.

A specific challenge for asset managers is that they may only need one or two metrics from a particular data package – often with a limited but important use case – but have to purchase the whole module at a significant cost.

“Flexible contracting to allow selection of individual indicators would be helpful,” says Niklasson. “The quality of certain modules varies across providers and so does the extent to which they meet the requirements of asset managers. Screening modules can vary in their granularity, for instance, while the methodologies for estimating carbon emissions can differ significantly.”

Harry Phillips, an analyst at asset management consultancy Devlin Mambo reckons suggestions that ESG ratings providers are providing incorrect information and patchy data are unfair and that fund managers may be oversimplifying and neglecting the breadth of information offered. However, he also accepts that it can be difficult to find providers that offer quality data at a fair cost.

Growing customisation

“The information available from data providers is not yet fully tailored to the specific requirements of asset managers, although over time data offerings will become more customised, which may lead to different outcomes in security selection and asset allocation,” says Delorme.

Access to data that spans different environmental and social factors can be challenging. Most ESG data is backward looking and can be delayed by more than a year, which on its own is not enough to predict future performance of a company – hence the collation of data on targets across all ESG factors will be incredibly helpful.

That is the view of Sinthuja Yogarajah, associate director ESG integration at Federated Hermes, who says not enough is being done to pull data together in a meaningful way. A good example of this is in the area of measuring biodiversity impacts and dependencies.

“The biggest challenge appears to be in providing company location data (including supply chains) – without this information, much of the biodiversity measurement is not meaningful,” she says. “We know this data exists amongst certain players in the industry and similarly, there are those who are able to measure biodiversity impacts and dependencies but lack location data. It would be great for these players to come together to provide meaningful outputs for asset managers.”

Man Group data science analysts Anna-Marie Tomm and Matthew Bell refer to variations in the methodologies that data vendors employ to measure ESG metrics making it difficult for investors to compare data across different providers. They recommend comparing correlations of similar datasets from different vendors in the same industry, carefully analysing their methodologies, and normalising and combining data from multiple vendors.

Regulatory reliability

Regulations such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) are expected to have a positive impact on the coverage and reliability of data as they will trigger a large increase in reported data from corporates.

Adrie Heinsbroek, sustainability manager at NN Group says this should improve the reliability of data vendor models and support the industry to move towards a standard for ESG data and methodologies.

“The differences between the data vendors provides choice,” he says. “The data is an input for our discussion and decision making as we can use it for preparing conversations with companies. The question is whether tailor made data is necessary as most asset managers or owners have in-house models and investment teams use the same data differently.”

The components of Scope 3 emissions can vary widely from company to company due to their indirect nature. In addition, smaller bond issuers with less resources to dedicate to ESG reporting can be adversely punished by ESG scoring providers.

“In fixed income, the biggest challenge by far is data coverage,” explains Johnathan Owen, portfolio manager at TwentyFour Asset Management. “ESG scoring providers only score listed entities, meaning around 50% of the investment grade bond issuer universe is unscored and asset managers have to do the work themselves.”

He says it is worth noting that in terms of market performance, the bond issuers that tend to enjoy the most spread tightening are not those with the highest scores but rather low-scoring companies that are on an improving trend and can be said to have momentum.

“Market demand and investor pressure are pushing companies and data providers to enhance transparency and accuracy in ESG reporting,” says Hamid Amoura, head of sustainable and responsible investing at Mirabaud Asset Management. “However, continuous effort is needed to address remaining challenges and further harmonise standards.”

Manager momentum

The drive for better quality ESG data could be described as a task with no end. But unlike Sisyphus in the Greek myth, asset managers believe they are making real progress towards making reliable, up-to-date environmental, social and governance information more accessible.

Delorme notes that many asset managers have taken more active roles in engagement and proxy voting and that an emphasis on ESG has led to better qualitative data.

The asset management industry has made notable strides in improving ESG data quality and refining standards through increased adoption of standardised reporting frameworks (such as the Global Reporting Initiative and the Task Force on Climate-related Financial Disclosures) along with enhanced data verification through third party assurance.

“In the asset management industry more experience has become apparent on interpreting data and connecting it to the relevant market and sustainability context,” says Heinsbroek. “The next step will be preventing data dependency by combining it with ESG due diligence to create a solid base for balancing responsible investing expectations with the related risk return in portfolios.”

Yogarajah says her firm would like to see more accountability from data providers on the quality of the datasets they make available – including a robust set of data quality checks – and that its preference has always been to make the underlying data available so the firm makes the call on how it aggregates and consumes the data.

“We are also engaged with standard setters and industry initiatives to create standardisation in the way we measure certain ESG risks and opportunities,” she says. “It helps all stakeholders when we speak the same language. Initiatives such as the Task Force on Climate-related Financial Disclosures and the Task Force on Nature-related Financial Disclosures have really moved the conversation along in terms of climate and biodiversity.”

Owen agrees that data quality has improved as investors demand a minimum baseline of data from every bond issuer.

“Regulations remain unclear and ever-changing though,” he concludes. “One meaningful step forward has been principle adverse impact (PAI) disclosures, a standardised set of data for all issuers and investors which at a minimum should ensure issuers are disclosing almost every mandatory PAI on a best-effort basis.”

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