Sustainability data has emerged as a vital component for investors, but they grapple with a plethora of providers and inconsistent standards. How can this disjointed landscape be streamlined for clarity and coherence?
While the demand for sustainability data is high, the supply is inconsistent. Each ESG data provider has unique ways of handling gaps in data, often resorting to modeling when companies don’t provide the required information. Furthermore, essential topics like biodiversity and human rights are measured with different indicators, and not all providers weigh these subjects equally. This divergence impacts how sustainability objectives are managed in investment portfolios.
Regulatory oversight
Brussels envisions data providers and ESG rating agencies in the EU operating under the European regulator ESMA, questioning the current practices where data providers also offer advisory services, sell credit ratings, and establish benchmarks. As per the Institute for Energy Economics and Financial Analysis, ESG ratings, in practice, exhibit significant variation and at times even contradictions.
Hazel Ilango from the Institute for Energy Economics and Financial Analysis underlines the difference in how data is interpreted: “I always look at the input, the output and the model: what are you trying to measure?” she said. Ilango proposes that ESG ratings should be classified based on their methodology, emphasizing that the ratings have morphed into risk tools, sidelining their social and environmental impact.
The clarity quest
KPMG’s Leonie Jesse points out the surplus of frameworks and rating systems currently in use, leading to confusion. As ESG becomes integral to investment decisions, the demand for clear, standardized data is paramount. The Corporate Sustainability Reporting Directive is anticipated to standardize the non-financial aspects of reporting by 2028, with expectations of 50,000 companies in Europe adhering to this directive.
Axel Pierron from Sustainalytics believes that the influence of data and rating agencies on investment portfolios remains minimal. Highlighting the intricacies of data interpretation, he remarked, “You have to look at other things besides data. That happens with the ratings.” Pierron argues against a single European standard at this stage, believing that diversity and transparency are more beneficial currently.
Beyond simplification
The sustainability challenge is vast. Pierron asserts that simplification is not the answer. A holistic approach to investment decisions is required that extends beyond just risk, return, and ESG ratings. There’s a universal consensus on addressing sustainability, but the exact methodology remains contentious.
European efforts in ESG regulation are being keenly observed globally. Regions such as Asia, although currently lagging, are introducing guidelines to address the challenges. There’s a pressing need for a global baseline to ensure consistency and coherence.
While the debate around the power of data providers continues, Jesse believes that they often operate with a competitive lens. She envisions a scenario where data providers embrace a common standard for the greater good of sustainability, rather than competing over whose framework is superior.
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