How investors are tackling the ESG data challenge
- Foreword
- Background
- The ESG data challenge – The main findings
- Data is the biggest barrier to ESG investing
- The data challenges for ESG and sustainability issues
- How investors apply data management techniques to ESG data
- Using a range of data vendors for ESG data
- Reporting on ESG investing and sustainability
- Conclusion
- ESG Global Survey 2023
- ESG Global Survey 2023
- How investors are tackling the ESG data challenge
- Key take-aways
- Foreword
- Background
- The ESG data challenge – The main findings
- Data is the biggest barrier to ESG investing
- Focus on ESG investing and North America
- The data challenges for ESG and sustainability issues
- How investors apply data management techniques to ESG data
- Using a range of data vendors for ESG data
- Reporting on ESG investing and sustainability
- Conclusion
Key take-aways
The following points stand out from the findings and form the basis of this report.
- ESG data remains a major issue for investors. For example, incomplete and inconsistent data and research is most likely to be cited as one of the most significant barriers to greater adoption of ESG investing, by 71% of investors, ahead of greenwashing (61%) or difficulties reconciling ESG with fiduciary duties (53%).
- The biggest ESG data challenges for investors are the poor quality of analytics for ESG data, its costs and inconsistency between different data vendors on the same ESG themes.
- To overcome data challenges, investors are using multiple sources of data, ensuring the transparency of raw data and conducting their own research methodologies, rather than relying solely on external providers. And a quarter of investors use data management techniques as part of their response to ESG data challenges.
- The most common use of ESG data vendors is for ESG scores and ratings, followed by green bond metrics, environmental issues and for alternative assets. Investors also use both generalist data vendors, where ESG data is part of the overall data offering, and specialist data vendors, who focus on certain aspects of ESG data, such as environmental data. In addition, investors often use a combination of generalists and specialist vendors.
- In terms of reporting on ESG issues, by far the most common approach among investors is to integrate data into existing financial reporting. Other approaches, such as providing raw ESG data, or dynamic data visualisations, or static reporting, are less widely used. New regulations, such as the EU’s Sustainable Financial Disclosure Regulations (SFDR), and adoption of net zero carbon emissions goals will increase the importance of reporting on ESG investing and sustainability.
Foreword
Every two years since 2017, BNP Paribas has conducted a detailed survey on how institutional investors are addressing some of the key issues in environmental, social and governance (ESG) investing. To produce the fourth survey in this series, CoreData Research, working on behalf of BNP Paribas, gathered the views of 420 institutional investors around the world on a range of issues and topics related to ESG investing.
As well as the quantitative survey, a small number of qualitative interviews were undertaken to follow up on some of key issues covered in the survey. Quotes from these interviews have been used in this report to illustrate the survey findings where appropriate.
This is the first of three reports giving key findings and analysis from the 2023 survey and it covers the topic of ESG data for investors. The need for timely and reliable ESG investing data has increased since 2017. Through this paper, we aim to shed some light on the main problems for investors with ESG data and how they are tackling these challenges.
Background
In its 2017 survey on ESG investing, BNP Paribas looked at the changing obstacles to ESG investing for asset owners and asset managers. The 2017 survey flagged up that a lack of robust data was a significant barrier to the adoption of ESG investing to 55% of all respondents, but this was expected to fall to 15% by 2019. Sadly, this expectation was not met; in the 2019 survey, 32% of investors gave the inconsistent quality of ESG data as one of the most significant barriers to greater adoption of ESG, with 27% citing conflicting ESG ratings and indices as a significant barrier. By 2021, over half (54%) of investors agreed that the inconsistent quality of data across asset classes was one of their top three most significant barriers to greater adoption of ESG investing, while 44% said that conflicting ESG ratings and indices were in their top three most significant barriers. These findings show that data has been a major obstacle for investors looking to increase their adoption and integration of ESG investing for some time.
The need for timely and reliable ESG investing data has increased since 2017 for a number of reasons. One is the increased emphasis on tackling climate change by many institutional investors, through decarbonising portfolios and engaging with investee companies, particularly with heavy emitters of greenhouse gases, to push for positive changes. And new regulatory requirements, such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR), require greater transparency on the disclosure of information related to sustainability. Another driver for more and better ESG data is the growing use of impact investing, where investors seek to make a measurable, positive contribution to their ESG goals. Now in 2023, as we see above, ESG data is even more of an issue for investors, with 71% citing it as a significant barrier to the greater adoption of ESG investing. Why is this the case, given the growth of ESG investing since 2017? What are the main problems for investors with ESG data and how are investors tackling the challenges they face? This report looks at these issues and attempts to provide some illuminating answers.
The ESG data challenge – The main findings
Obtaining accurate and reliable data is a vital requirement for investors for a range of reasons, including performance measurement, risk management, assessing competing investment opportunities and disclosing on the progress of their ESG commitments. Indeed, investment success in public equities or bonds is partly driven by the ability to gather and analyse the constant flow of market data, to find and exploit overlooked anomalies, or to manage assets in the most efficient way.
The rise of ESG investing has added further layers of complexity to the use of data by investors. Increasingly, investors using ESG investing strategies want data that is forward-looking and covers emerging topics and approaches, such as decarbonisation, biodiversity or impact investing. ESG investing data can be quite different to the traditional data tools used to assess assets, as it may involve more subjective judgements or data which is hard to find and record. As a result, the lack of reliable and accurate data is often cited as a hindrance for ESG investing. To address these ESG data challenges, investors must find ways to cope with poor quality, incomplete or inconsistent data, including internal data management techniques and working with others to improve the quality of data available to them.
INVESTORS USING
ESG INVESTING
STRATEGIES WANT
DATA THAT IS
FORWARD-LOOKING
AND COVERS EMERGING TOPICS
Data is the biggest barrier to ESG investing
When respondents were asked about the biggest barriers to greater adoption of ESG across their portfolios, over seven-in-ten (71%) named incomplete and inconsistent data. This was generally a consistent result, across regions and investor types. One discrepancy was that only 58% of corporate pension funds gave this as a significant barrier, but they were more likely to cite lack of internal and external support and difficulties reconciling ESG with fiduciary duties as significant barriers. An ESG investment specialist at a US corporate pension fund said the lack of top-level commitment at his organisation was the biggest barrier to its adoption of ESG strategies. “It’s just not a priority for the key decision-makers, which is a struggle. We are an USD18 billion company with a team of two people for ESG”, he said.
Incomplete and inconsistent data was followed by greenwashing (61%) and the difficulty of reconciling ESG investing with fiduciary duties (53%), as significant barriers. On this question, there is a relatively high degree of consensus among the regions.
The significance of inconsistent and incomplete ESG data as a barrier to the greater adoption of ESG
For hedge fund and private equity managers, fewer cite difficulties reconciling ESG with fiduciary duties as a significant barrier (45% vs. 53% overall). One reason for this could be that some in this group have embraced ESG investing as enhancing risk management and see sustainability as a positive factor, perhaps on the back of investor demand for hedge funds and private equity funds with positive ESG credentials. Hedge funds and private equity investing could also, through a higher degree of control of the private assets, make use of impact investing, where making a positive contribution to ESG criteria is a key goal.
CORPORATE PENSION FUNDS CITE LACK OF INTERNAL AND EXTERNAL SUPPORT AND DIFFICULTIES RECONCILING ESG WITH FIDUCIARY DUTIES AS SIGNIFICANT BARRIERS
Alongside the findings above, two-thirds (66%) of respondents agreed that undertaking climate analysis is becoming more important to their investment approach. Many investors have now committed to a net zero target with their investment portfolios, and this requires data on carbon emissions to decarbonise their portfolios. A sustainability expert at one Dutch wealth manager commented: “We were only able to commit to targets on climate and carbon footprints in 2020 because before that there was not reliable data on carbon footprints and aligned definitions from around the world”. He said that while scope 1 and 2 data is improving, scope 3 data is still a problem[1] . He added: “On other topics, such as biodiversity, it is still very early days to come up with clear KPIs, targets and goals, because it is very difficult to get that data”.
And where ESG data is provided, inconsistency and incompleteness can be an issue, as the findings show. Views on how to deal with this vary among investors. Some see data inconsistency and incompleteness as inevitable but manageable. For example, an ESG investment specialist at a US pension fund said: “I understand that different data providers have different processes. The way to get around inconsistent data is to engage. As a very large asset owner, we are not doing our job if we cannot get company X on the phone to give us some more clarity on an issue”. And an investment manager at a European asset manager specialising in impact investing commented: “We are an active investor and data is one thing, but really understanding an investment is even more important”.
However, ESG data issues can make it harder for an organisation to use bespoke benchmarks that reflect its ESG policies. An investment committee member at a European pension provider explained that it wanted customised benchmarks for its equity and fixed income portfolios, taking into account its adoption of three UN Sustainable Development Goals (SDGs) and its carbon reduction target. “The barrier here is the lack of knowledge and the unwillingness of some providers that are trying to push us to use standardised benchmarks”, he said. Views like this, along with other findings in the survey, show that ESG data is not yet fully meeting the needs of investors.
Focus on ESG investing and North America
The results in this survey show that North American investors often differ to their peers elsewhere when it comes to ESG investing. For example, North American investors are less likely to have made a commitment to net zero by a certain date, such as 2050, (28% vs. 41% globally). On the other hand, the integration of diversity, equity and inclusion (DEI) goals into investment policies is more likely to be a key ESG objective for the North American respondents (54% vs. 41% globally).
INVESTORS OVERALL HAVE CONCERNS OVER POLITICAL OPPOSITION TO ESG INVESTING, THIS RISES TO 48% OF RESPONDENTS IN THE UNITED STATES
One reason for this divergence between North American investors and other regions is that while 40% of investors overall have concerns over political opposition to ESG investing, this rises to 48% of respondents in the United States. However, the level of concern over political opposition to ESG investing is also high in a number of other countries, namely the Netherlands, Sweden, Denmark, Spain and Singapore. A US asset owner said the political backlash against ESG provided a convenient excuse for some: “If you were truly committed and your ESG commitments were not dictated by signal or noise, you will continue. But if you had one foot in and one foot out, then it’s a reason to quit”.
The data challenges for ESG and sustainability issues
Investors have several issues when working with ESG data, with their top three challenges being poor quality analytics for ESG data (46%), the cost of ESG data (40%) and inconsistency between different data vendors on the same ESG themes (40%). Other challenges mentioned include a lack of transparency in non-financial data (31%), aggregation at portfolio level (34%) and data being too backward-looking (25%).
In terms of variation by region or investor type, European respondents (46%) and asset managers (48%) were more likely to give the cost of ESG data as being a top three challenge. Hedge funds and private equity managers (52%) and APAC respondents (51%) were the most likely to give the poor quality of analytics for ESG data as a top three challenge. Within the APAC region, respondents in China are most likely to cite poor quality of analytics for ESG data as a challenge (67%). The chief investment officer at a Chinese asset owner said: “It is very difficult to find sufficient, reliable data in our domestic market. For listed companies, it is possible, but below that, it is very difficult”. For European respondents, the cost of ESG data could be more of an issue than in North America and APAC because Europeans are more likely to use multiple vendors to meet their data needs on issues such as environmental data, or for ESG scores and ratings, raising their data costs.
The biggest challenges when obtaining and using high-quality data on ESG and sustainability issues
Another nuance here is that the cost of ESG data is less of an issue for asset owners (32%) compared to asset managers (48%). This is likely to be because asset managers may need to purchase more data, to ensure the ESG credentials of their investment products and strategies, or risk regulatory issues and greenwashing accusations.
In response to the challenges of ESG data, investors are taking several steps. Almost two-thirds (65%) say that they are using and comparing multiple data sources, while 45% are ensuring the transparency of the source of raw data and 37% are conducting their own research methodologies, such as creating benchmarks or in-house ESG scores, instead of relying solely on external providers.
Each of the regions have their own preferences here: North American respondents are more likely to use and compare multiple sources of data (72% vs. 65% overall), Europeans are slightly more inclined to ensure the transparency of the source of raw data (49% vs. 45% overall) and APAC respondents are more likely to both conduct their own research methodologies (43% vs. 37% overall) and to ensure the transparency of the source of raw data (52% vs. 45% overall).
Looking at investor types, hedge funds and private equity firms (60%) are the most likely to ensure the transparency of the source of raw data, followed by asset managers (47%) and then corporate pension funds (45%) and insurance companies (42%).
THE COST OF ESG DATA IS LESS OF AN ISSUE FOR ASSET
OWNERS (32%) COMPARED TO ASSET MANAGERS (48%)
When investors find discrepancies between data providers, they may dig deeper into the data and how it is generated. A European asset manager explained that it cross-checked data with its portfolio managers, who often know the companies involved well. It also engages with companies if there are differences between their reporting and a data provider’s metrics. He added: “We engage with our three data providers and the companies”. At a Canadian sovereign wealth fund, an investment director said it conducted an in-depth reconciliation process between data vendors, a process he called “data scrubbing”. And an Australian investment manager at a superannuation fund said it sought to verify ESG data. “We have our own ideas around how companies should be scored under different metrics. If we see inconsistencies, we will go and validate the data”. He added that this could involve looking at the providers’ underlying philosophies. “We want the closest alignment between our own philosophies and the provider’s philosophy”.
HEDGE FUNDS AND PRIVATE EQUITY FIRMS ARE THE MOST LIKELY TO ENSURE THE TRANSPARENCY OF THE SOURCE OF RAW DATA 60%
Steps taken to get around data challenges relating to ESG
How investors apply data management techniques to ESG data
A quarter of the respondents said they implemented data management techniques to customise ESG data. This figure rose to 38% of hedge fund and private equity providers and fell to 21% of asset owners. By region, it is highest in the APAC region (32%), compared to 25% of European respondents and 19% of North Americans. The 25% of all respondents who implement data management techniques were asked about their ESG data management methods used. Half said they use heavy data quality checks, including filling the gaps, 44% use simple portfolio aggregation rules only, while just over four-in-ten (41%) create new ESG data fields by leveraging multiple data sources and raw data.
ESG data management methods used by investors
Data management techniques can involve using assumptions or estimates to fill data gaps. One respondent, at a large Danish pension provider, commented: “We sometimes have had to use the law of big numbers; sometimes it is about averaging out or trying to make guesstimates. We are trying to do the best we can, given the circumstances and given that data can be patchy, or misleading, or point in many directions”. However, data management techniques like this can also be a challenge to investors if they find them in use at their providers. An APAC region portfolio manager said: “If a provider is not covering particular stocks, we found it is quite common that they will apply some kind of machine learning algorithm. Then you really start to get into this world of estimation, as it is assuming two companies in the same industry broadly look the same. The degree of estimation that some of the providers use is a challenge for us”.
But data management techniques can be innovative in their scope. An example of the creation of new ESG data was brought up by a Dutch asset manager which specialises in real estate. It wanted to stress-test physical risks so has formed a partnership with a large insurance company. “We are the real estate specialists, and they are experts in how to price climate risk. We have combined our databases into one, a really big data approach. Every commercial real estate building in the world is in our database. We price specific flooding risk, earthquake risk, or tornado risk, whatever it is, into our systems”. At a North American pension fund, an ESG investment specialist said it was conducting a research project with a respected academic expert on how stocks perform based on labour management standards. “I hope that within a year, we will start to understand that level of financial risk on an asset level basis”, he commented.
25%
OF THE RESPONDENTS SAID
THEY IMPLEMENTED DATA MANAGEMENT TECHNIQUES TO CUSTOMISE ESG DATA
Using a range of data vendors for ESG data
Investors use a range of ESG data vendors to help them understand ESG factors across different asset classes and with different functions, from calculating carbon footprints to proxy voting. They use both generalist and specialist data vendors and a combination of multiple vendors. For example, for UN SDGs, 55% of investors use a generalist or full coverage vendor, which offers a broad range of investment data, such as fixed income credit ratings, as well as ESG data. Overall, looking across the use of generalist vendors, specialist vendors or a combination of multiple vendors for a wide range of scenarios for ESG investing, generalist vendors are used by 40% of respondents, 24% use specialist vendors and 35% use a combination of multiple vendors. For some scenarios, such as for ESG scores/ratings, a combination of multiple vendors is the most popular option (43%), ahead of generalist vendors (39%) and specialist vendors (18%). The UN SDGs have been in existence since 2015, so generalist vendors have had some time to adapt to them. However, when using ESG investing in alternative assets, such as private equity, real estate and infrastructure, investors are more likely to use a variety of vendors to obtain ESG data. Here, 45% use a combination of multiple vendors and 30% use specialist or niche vendors. For alternatives, asset managers are more likely to use both specialist data vendors (34% vs. 30%) overall and combination of multiple vendors (54% vs. 45% overall).
Areas where generalist, specialist or multiple data vendors are used
At a European asset manager, the chief sustainability officer commented on the issues with ESG data for different asset classes: “Our ESG policies in public markets are relatively well-developed because we have the data. On private equity, private debt, real estate, infrastructure and farmland, the ESG policies will be developed in the next few years because the data is lagging, but the potential impact is much bigger. For example, we have had a sustainable farmland fund for two years, but you need to collect the data yourself because there are no data providers in that area”. This comment indicates why the use of multiple data vendors is higher for alternative asset classes.
Investors use a range of ESG data vendors to help them understand ESG factors across different asset classes
In some countries, there is still a limited supply of third-party data on ESG. A Chinese asset owner commented: “In general, in the Chinese market, the data sources are less complete than in the US with Bloomberg and other vendors like that. But the supply of ESG data is improving and I expect it to grow rapidly in the future.”
Larger investors may use more than one of the major data vendors to create a bigger data set. A European investor commented here: “We now use MSCI ESG data, but we also use ISS and Sustainalytics. To complement the data, we bring it all into one database. And if we miss data, we start engaging with those three first”. The importance of data and the use of multiple vendors was described by an investment director at a large Canadian sovereign wealth fund: “We do not have one data vendor, we have dozens. Data is one of our biggest cost drivers”.
One positive development here was flagged up by BNP Paribas Global Head of Sustainability for Financial Institutions Coverage (FIC), Marie-Gwenhaëlle Geffroy, who said: “We are part of a number of industry initiatives on ESG data and we believe that it should be as comparable as possible. In order to do that, we need to work together to define the raw data that we want to access and put it in a common repository. We are working with number of other banks and financial institutions on an accessible open platform for climate data”.
Reporting on ESG investing and sustainability
In terms of their preferences for report formats and approaches, when producing ESG reports, the most popular approach is to integrate this into existing financial reporting, with 72% of respondents ranking this in their top three reporting formats and approaches, ahead of static reports (54%), dynamic data visualisation (53%), data sets and extractions (49%) and raw ESG data (48%). These results are fairly consistent across regions and by investor types. One variation is that asset managers are more likely to use dynamic data visualisation (58%) and less likely to use static reports (49%). This is likely due to a desire for more up-to-date reporting formats among asset managers. In contrast, hedge funds and private equity firms are less likely to use dynamic data visualisation (38%) and more likely to use static reports (62%), possibly because they are smaller organisations with less resources available in IT or reporting.
One reason for the popularity of integrated ESG reporting is that regulators are now starting to require greater disclosure of ESG and sustainability factors. A European pension fund board member commented: “According to European legislation, we have to put more and more information in our annual report, which is currently being audited by our external auditor”. As a result, investors need to ensure that the ESG data used for their annual report is accurate and can be justified. And having raw ESG data could be useful as an input for reporting and to help make investment decisions.
INVESTORS NEED TO ENSURE THAT THE ESG DATA USED FOR THEIR ANNUAL REPORT IS ACCURATE AND CAN BE JUSTIFIED
Conclusion
The ultimate goal for investors is to obtain high-quality data on the widest possible range of asset classes, as they increasingly seek to incorporate ESG and sustainable investing into private markets, real estate, infrastructure and other asset classes.
BNP Paribas’s Marie-Gwenhaëlle Geffroy summed up what is needed: “ESG data must help investors assess portfolios, manage risk, and take into consideration the current and historic impact of the ESG components on performance and strategy. It is more important than ever, if we want to turn sustainability into an opportunity, that ESG data is embedded in investment strategies”. In this sense, ESG data can be compared to a compass, helping investors chart their course and identify the best pathways to profit and impact. In order to act as a compass that can guide investors on the path to investing sustainably and responsibly, ESG data needs to be accurate, available and presented in a way that can be embedded effectively into investors’ overall approach.
[1] Scope 1, 2 and 3 emissions are different categories of greenhouse gas emissions. Scope 1 emissions are directly due to an organisation’s activities and operations, while scope 2 emissions are indirect emissions created by the production of energy that an organisation buys. Scope 3 emissions are harder for an organisation to control, as they are indirect emissions from across a company’s value chain, from customers using a company’s products, or suppliers making products used by a company.