The coming revolution in ESG data

Today we launched our latest insights piece on the Future of Environmental, Social and Governance (ESG) Data.

As the trillion-dollar sustainable investment industry continues to grow, we need to make sure the data underpinning these investment choices are up to the task. 

The quality and quantity of ESG data has improved in recent years, but it remains patchy and inconsistent. Many companies now disclose their greenhouse gas emissions. Meanwhile, data for social indicators is still very limited. There is much discussion about closing these data gaps and improving comparability. While this makes sense, we think the issues go much deeper.

The piece calls for a revolution in ESG data. As investors committed to a sustainable future, we need forward-looking data that demonstrate a company’s impact in the real world and its pace of progress – towards meeting science based targets, for example, or towards closing the gender pay gap. We also need to assess management quality as company executives grapple with a disruptive transition to sustainability.

We need to keep our eyes on the horizon, but there are many examples of this ESG data revolution already taking shape. The digitalisation of our economy is creating many opportunities to design and deliver robust ESG datasets that are aligned with high ambition for sustainability. We identify five key enablers for ESG data:

Machine learning and predictive ESG

Today, the vast majority of ESG data are still punched into spreadsheets using inputs from company reports. With machine learning, we can now gather - and process - multiple datasets into meaningful ESG data at scale and serve them up to an analyst or into an ESG index.

Remote sensing and external disclosure

Satellite data can now track progress on sustainability and, to an extent, are diluting the control that some companies have over their own disclosure. One example of how we can connect data with real world impact comes from @Carbon Tracker – an independent think tank researching the impact of climate change on financial markets. With satellite imagery, Carbon Tracker assesses the utilisation of fossil fuel power plants with a high degree of accuracy, which could lead to a step change in the quality of emissions calculations.

Third party verification

Companies are increasingly able to provide traceability throughout entire supply chains. Whether enabled by blockchain or simply encrypted data, third party verification of this information can provide deep insight for ESG. For instance, it will soon be possible to assess performance at the product and company level – like tracking real time emissions from a vehicle fleet. This could mean companies are scored both on their openness to third party verification, as well as on the real world environmental and social impact of their performance.

Disaggregation of Accounts

A key limitation of current ESG data is that it provides single, aggregated ‘scores’ for companies. Analysts can break out companies into subdivisions, geographies and products, but data are typically provided at mixed levels of detail. We are advocating for separate scores for distinct business units within large, complex companies. This would not only create a healthy competition for companies to excel against ESG metrics but would improve investors’ ability to assess risk - and opportunities.

Open Access

Leading ESG data platforms may be easier to use, but are often expensive, behind pay walls and not accessible to those outside the investment sector. We would like to see open access to these platforms for civil society and non-profits so we can better scrutinise companies and investors.

We recognize that there is no simple solution to this issue; it will take active collaboration with multiple stakeholders. We look forward to partnering with others to build the next generation of analytical tools that can underpin the fast-evolving landscape of sustainable investment.

The Future of ESG Data is free to download from our website. Please visit https://www.generationim.com/research-centre/insights/the-future-of-esg-data/ to read the piece in full.