More broadly, the lack of consistency, standardization and independent assurance undermines the credibility of ESG data markets as a whole. This is a growing concern, given the increasing costs of compliance failures and the threat from damaging allegations of greenwashing – as illustrated by a number of recent regulatory fines and high-profile resignations at major financial institutions7.
These concerns are fuelling appetite for regulation – especially of leading data vendors. In April 2022, the European Commission published a consultation on ESG ratings that will feed into an impact assessment of a possible EU intervention into ESG data markets. In a recent feedback statement, the UK’s FCA also cited a “clear rationale” for regulatory oversight of ESG data and rating providers.
Robust data management is increasingly important
Many buyers of ESG data could use it more efficiently and effectively. One common problem is that many different activities require ESG data, including regulatory reporting such as SFDR disclosures, financial reporting, portfolio management, stress testing, strategic planning and procurement. Without central coordination, firms can acquire multiple ESG data licenses in a haphazard way. Apart from the excessive costs incurred, this can also lead to confusion over data management and access.
Excessive costs are not the only problem. Many firms are also failing to extract full value from the data they have purchased. That is partly about failing to use all the data that’s available to licensees, and partly about failing to identify all of the potential applications for that data within the business.
Finally, the relative novelty of ESG data means that operations and governance can sometimes be weak. A lack of suitable technology, data professionals and oversight can lead to overreliance on manual processing, an absence of effective data validation, information silos and a loss of version control – all of which breed inefficiencies and confusion.
In response, use of strategic data management is increasing. There is clear scope for firms to cut costs and increase benefits by integrating ESG data into enterprise-wide data management strategies. After all, ESG data is increasingly being used alongside conventional financial disclosures as part of investment decision-making and for a range of client and regulatory reporting.
Looking ahead
ESG data markets are more dynamic than ever. Data coverage and categories are advancing rapidly, but there are still many gaps, questions and inconsistencies to be addressed. Quality does not always keep up with quantity.
These shortcomings will take time to address, and vendors cannot solve every problem. Even so, innovation from industry leaders and new entrants will continue to drive improvement. We are starting to see movement towards collaboration on industry platforms. Besides privately led initiatives to develop open-source platforms to exchange ESG data in a harmonized way, we also see regulators like the EU Commission pushing forward with their plan to launch the European Single Access Point (ESAP). ESAP is intended to act as a direct access point for obtaining ESG and financial company data in machine-readable form. Companies would be asked to provide annual financial statements and management reports and, once CSRD comes into effect, sustainability reports including detailed information on the EU Taxonomy. The proposal also opens up the possibility of collecting additional data on a voluntary basis, provided that certain technical and qualitative standards are adhered to8.
All this will help to improve the availability, quality and accessibility of ESG data as well as the efficiency with which financial institutions work with and use ESG data. The availability and quality of reported data should receive a further boost once the Non-Financial Reporting Directive (NFRD) and Sustainable Finance Disclosure Regulation (SFDR) take their full effect.
Even so, it’s highly likely that many users of ESG data will need to rely on multiple data providers for the foreseeable future. The good news is that there are actions users can take now to trim costs, reduce risks and maximize the value they derive from ESG data. The following focus areas will be critical to any ESG data strategy:
- Migrating to a single data later which supports all ESG use cases and is accessible for all involved teams, will strip out the cost of duplication and lower the data risk around inconsistency.
- Using a data model that integrates key ESG frameworks into a single data model and visualizes the data lineage will help identify overlaps between different frameworks and support the rationalization of external data sources.
- Embedding an ESG data governance operating model can be leveraged to streamline the data governance activities required, to provide a holistic view of priority data management initiatives.
Natalie Brandau, Manager, Wealth and Asset Management, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaftco-authored this article
Jo Freeman-Young, Sustainability Actuary, Consulting, Financial Services, Ernst & Young LLPco-authored this article
FAQs
ESG can help examine the risks and opportunities for different stakeholder groups. In short, the financial services sector can increase value around ESG by facilitating value exchange, managing risk, allowing for more value-based investment, and providing the security and confidence needed to drive economic growth.
What is ESG data in finance? ›
What is ESG data? The 'E', 'S', 'G' in ESG data stands for, “Environmental, Social, and Governance” – otherwise known as the three key components that companies will use to determine the environmental efficacy and sustainability of their cooperation.
How do ESG factors affect the financial performance and valuation of companies? ›
The research underscores that when companies prioritize material ESG factors in their earnings calls, it positively influences their overall value. For every 10% increase in emphasis, the value goes up by 1.4%.
What is the market trend for ESG data? ›
Following two years of unprecedented growth, the market for ESG data continued its winning streak in 2023, albeit with a more modest year-on-year growth rate of 17%. In a new report – The Market for ESG Data in 2024 – Opimas finds that the global market for ESG data should exceed the US$2 billion mark in 2024.
What are the risks of ESG in financial services? ›
When occurring, ESG risks will have or may have negative impacts on assets, the financial and earnings situation, or the reputation of a bank. ESG risks include environmental risk, social risk and governance risk and the resulting impact on banks' P&L and liquidity.
How does ESG impact finance? ›
While ESG data collection and reporting is the first step of a company's ESG journey, it does not by itself lead to financial improvement. According to McKinsey, studies show that strong ESG performance is positively correlated with higher equity returns and reduction in downside risk.
Why is ESG data important? ›
ESG data helps investors assess a company's risk profile, growth potential, and resilience to environmental and social challenges. It enables them to align investments with their values and sustainability objectives, integrating financial returns with positive societal and environmental impacts.
What is ESG in simple words? ›
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
What are the benefits of ESG data? ›
By incorporating ESG data into their reporting, organisations can demonstrate their commitment to sustainability and corporate responsibility and provide stakeholders with a more comprehensive view of their operations and performance. A more complex layer of ESG is the S, Social Value.
Is there a link between ESG implementation and financial performance? ›
Friede et al. (2015) summarized and analyzed over 2000 ESG-related studies and found that approximately 90% indicated a positive relationship between ESG and financial performance.
We found a positive relationship between ESG and financial performance for 58% of the “corporate” studies focused on operational metrics such as ROE, ROA, or stock price with 13% showing neutral impact, 21% mixed results (the same study finding a positive, neutral or negative results) and only 8% showing a negative ...
Is ESG actually effective? ›
ESG funds have similarities to other funds
While the results from these time periods have been generally encouraging for ESG funds as a whole, we don't see convincing evidence that ESG funds are reliably better than non-ESG funds.
How big is the ESG market in financial services? ›
According to 360 Market Updates new survey, global ESG Reporting Services market is projected to reach US$ 1934 million in 2029, increasing from US$ 976 million in 2022, with the CAGR of 10.3% during the period of 2023 to 2029.
Which industry is most affected by ESG? ›
Manufacturing is one of the industries with the greatest impact on the environment, society, and governance. Significant ESG concerns threaten its long-term viability and competitiveness.
Why ESG is the next big thing? ›
ESG Is Banking's Next Big Thing!
The voice of consumers and employees is becoming increasingly influential when it comes to ESG practices. In a survey by PwC, a striking 83% of consumers expressed the belief that companies should actively engage in creating ESG best practices.
What is an example of ESG data? ›
While ESG metrics (performance measures) can be either quantitative or qualitative in nature, companies will still need to provide very specific information on distinct topics. Examples of ESG metrics include indicators like greenhouse gas (GHG) emissions intensity, waste production levels, and board gender diversity.
What is ESG data and how to use it? ›
ESG data refers to environmental, social, and governance information that companies disclose to measure their sustainability and ethical practices. It includes data on carbon emissions, diversity and inclusion, labor practices, board composition, and more.
What is ESG data on Bloomberg terminal? ›
ESG Scores
Bloomberg provides a variety of proprietary scores that investors can use to assess company or government disclosure and performance on a wide range of ESG and thematic issues. Bloomberg's ESG and thematic scores can integrate into company research and portfolio construction.
