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ESG Data: Should Investment Firms wait for Data Standardization?

Recent ‘call for evidence’ report from ESMA highlights the following issues on ESG ratings –

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1. Majority of users contract data from multiple ESG providers.
– Mainly due to lack of standardization and the early stage of ESG ratings market.

2. Depth and coverage was most important attribute for selection of an ESG provider followed by data quality and transparency.

3. Lack of granular data on small/medium enterprises and non-listed companies is affecting usability and relevance of ESG ratings.

4. ESG ratings providers lack enough skilled resources to keep up-to-date on the ratings of the entities they cover.

5. There is an increased concentration of ESG ratings providers from the US – an ‘US Bias’.

6. Key issues around ratings methodologies include data accuracy, transparency on the rating process and data sources.
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So here is my take on above findings –

Are existing ESF data vendors the right players for sourcing, validating and distribution of ESG ratings data?

The challenges around sourcing, validating and analysis of entity data is as important as keeping it up-to-date if the data has to be useful for end users. Unlike credit rating firms which have ‘armies’ of people looking into it and the ratings process mastered – the ESG ratings market is relatively new, and the ratings process is in early stages.

I think the consolidation of data providers will happen over time where ‘group’ of niche ESG ratings providers catering to specific industry/market will develop resulting in ‘usable’ data such as we see in data on credit ratings.

Also, the ESG ratings market needs to mature before end users can use this data with ‘full’ confidence for all entities in their portfolios lest we continue to experience ‘green’ washing.

It is good to know that investment firms are seeing greater demand from investors for the ESG data and I think this will continue.

Given this demand, pro-active investment firms should continue to work on centralizing their data management and include existing available ESG data until standards develop i.e. firms should assume ESG ratings data will need to be sourced from multiple providers, provide ability to merge to create a golden copy with ability for analysts to review and change accordingly.

Therefore, for investment firms, having an open and a transparent approach to how ESG data is being used in the investment process is important.

In addition, communicating the same to all investors will go a long way in reducing risk of ‘green washing’ and building trust.

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