Prepare for a Data Revolution as Investors Tackle the $4 Billion ESG ‘Wild West’

ESG will be the catalyst for a new data revolution.

Traders and investors are making it a point to manage risk – crunching the numbers to navigate credit to the counterpart of the more recent fallout from skyrocketing inflation. These types of risks have been broken down into manageable numbers and traded accordingly.

But when it comes to measuring environmental, social and governance metrics, companies may need to rework their approach. If, for example, one company is really good at hiring women and minorities, but another company is close to net zero goals, how can investors boil that down to comparable numbers?

“They are really good at turning things into ones and zeros. But in this space, it’s actually quite qualitative information. And that is subject to interpretation,” said Marion Leslie, chief financial reporting officer at SIX Group.

The complexities of ESG will drive demand for more personalized data, Leslie said. SIX is looking to expand its data services following the London Stock Exchange’s acquisition of Refinitiv and S&P’s merger with IHS Markit. ESG data is an area ripe for expansion.

The stakes are high – the ESG sector is expected to reach $41 billion by the end of this year, according to data compiled by Bloomberg. Disclosures are fast becoming mandatory, with the UK becoming one of the first countries to require companies to disclose their climate-related risks based on TCFD recommendations. Since the start of this year, 1,300 of the UK’s largest companies have been required to publish climate risk reports.

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Even without regulatory pressure, companies are incentivized by the market to disclose their ESG goals and plans.

“The money will go to those who have sustainability credentials,” Leslie said, adding that over time companies that haven’t published their plans will find it increasingly difficult to get loans. and capital.

But it is a thorny path.

“How do you rank the importance of E, S and G? And what do you consider to be E? she said in an interview with Financial news. Demand for metrics to measure ESG is growing rapidly as funds, investors and many other market watchers scramble to secure a share of the $4 billion green financial windfall.

Some companies may seek to prioritize water sustainability while others may scrutinize a company’s impact on the local community.

Leslie said preferences will play a major role. Differences in priority around ESG elements – from one investor to another – could impact the way data is consumed.

This has recently played out at a high level in the EU taxonomy, with the inclusion of natural gas and nuclear as green investments. The war in Ukraine has also sparked a debate on whether defense companies should be similarly included in ESG.

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“Everyone is going to agree on this and what they think is important. You have individuals who will both be very happy investing in crypto but also hold sustainable investments, although some would say that cryptography is not particularly sustainable investment,” she says.

Another hurdle is the immaturity of ESG data, which Leslie calls a “Wild West.”

“Datasets that reflect sustainability and ESG are disorganized, patchy, not always available or reliable, and unverified by third parties. The level of organization around it is lacking compared to how people want use it.”

“There’s going to have to be some kind of auditability between what people say and what they actually do,” she said, adding that it’s important to be able to check whether the objectives are being met. , not only to protect the integrity of ESG data, but to ensure that companies are indeed moving towards a fair and sustainable business model.

“At the end of the day, that’s where the real economy hits the financial markets. It’s not always a square peg in a square hole.

Climate change and social impact issues are moving higher up the agenda of funds and asset managers. But as the data space matures and companies move closer to major goals set for 2030 and 2050, the current retrospective report won’t be enough.

“Looking back on a company’s performance will no longer be enough when you’re investing for the future and looking at regulatory risks.”

The ultimate risk is greenwashing. Emerging data disclosures and lack of standardization across the space add to this risk. Two cases have highlighted how easily ESG can be wrong: Deutsche Bank’s asset management arm, DWS, is being questioned by German and US regulators over its sustainability claims, while BNY Mellon was fined $1.5 million in May for misrepresentations and omissions on ESG funds. .

To contact the author of this story with comments or news, email Jeremy Chan