7 minute read 18 Oct 2021
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How environmental, social and governance (ESG) data providers compare

Authors
Mike Zehetmayr

EY EMEIA Financial Services Risk, Compliance and Regulatory Technology Leader

Leader in understanding the application of data in transition to a low carbon and sustainable economy. Fellow of the Royal Geographical Society.

Natalie Brandau

Senior Consultant, Consulting, Wealth and Asset Management, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

Focused on supporting wealth and asset management clients playing their role in creating a sustainable world. Passionate about sports, yoga, nature, books and life-long learning.

Contributors
7 minute read 18 Oct 2021

Data is absolutely critical to ESG investing, but financial services companies need more transparency to make the right choices.

In brief
  • Selecting the most appropriate and useful ESG data vendors starts with knowing what your data needs are. 
  • EY analysis of more than 100 data providers and their data service offerings reveals varying support for key ESG aspects.
  • Financial services firms can create greater value from external ESG data through a strategic data roadmap, from sourcing to assessment and integration.

W
hen it comes to data, the concept of “garbage in, garbage out” applies to green investing as much as other investment strategies. While investors need a baseline level of standardized data to support relevance, objectivity and comparability, they face fragmented data from multiple sources, including company reports, news articles, data vendors and rating agencies. 

There is currently a clear challenge with the quality and consistency of environmental, social and governance (ESG) data, driven by maturing corporate reporting standards, and the variety of taxonomies and methodologies used by the various ESG data providers.

Nevertheless, ESG data integration must evolve quickly, as investors are demanding more precise and more transparent investment decisions, amid rising concerns about greenwashing. Our EY teams believe that ESG reporting needs to mature to have the same level of rigor and relevance as financial disclosures to better enable investors to understand the economic impact of different ESG strategies and targets.

In response, EY teams conducted research and found that leading financial services firms have started to integrate ESG into their systems and processes, including comprehensive data and technology solutions that allow portfolio managers to see and interrogate ESG metrics as easily as they can traditional financial metrics, and many of these leading firms no longer rely solely on ESG data vendors, instead combining vendor data with firm data to derive greater insight. Even at the simpler end, firms now purchase multiple data sets and overlay that with their own analysis.

Still, these significant investments in data, systems and specialists are hampered by an ESG rating agency and vendor landscape that is complex and lacks consensus: from missing consistency and correlation in the underlying data sources to the challenges associated with mapping financial services firms’ unique ESG data needs against the various solutions in the market, it’s hard to determine how vendors and solutions compare. 

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Chapter 1

ESG data provider comparison

Develop an informed approach to using external vendors to supplement in-house data and expertise.

Our analysis of more than 60 of the largest financial services firms across Europe and the US shows that most companies use between 2 and 5 different providers, while some even use up to 10 different third-party vendors to cover their ESG data needs. Clearly, there’s no single all-singing, all-dancing ESG data solution that fits all needs.

State of the ESG data provider market

To help clients integrate ESG into their processes and systems, EY teams undertake a regular analysis of the ESG data provider landscape, looking at over 100 data providers and their data service offerings. Here are the key takeaways from that analysis:

1. Support for key regulations varies

Some firms offer a suite of tools that cover multiple use cases, but many are focused on specific aspects of ESG. The table below outlines the number of providers and their support for key regulations such as the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, and the Task Force on Climate-Related Financial Disclosures (TCFD). Also shown is data coverage across offerings like ESG scorings and indices, ESG raw data and sentiment analysis as well different climate relevant modelling capabilities:

ESG data providers offer a range of different ESG data solutions
2. All models apply simplified assumptions and therefore reduce the relevance of results

Off-the-shelf models do not accurately capture tail risk events and uncoordinated or delayed policy action. The key is to find a model which best represents the investment asset’s business, industry or market and enhance the results with adjustments to tailor it to each firm’s individual situation.

3. The aggregation of data is not always transparent

Understanding data inputs, assumptions and limitations is essential to understanding results. For example, some rating firms “overweight” particular ESG themes, and firms will need to determine whether these are material for them. Some rating firms also calibrate their score with sentiment analysis, while others do not.

4. There is a lack of correlation between ESG scores

Consistency of ESG data is a challenge where investors are trying to compare like-for-like. There is an argument that standardization of scoring methodologies is not always appropriate since different firms will face different materiality of risk. The only area where consistency is assured is regulatory reporting.

5. No solution can model all asset classes

Most data solutions cover equities and corporate debt, with property and infrastructure captured, in part, through physical risk modeling. This still leaves a large proportion of assets unaccounted for, particularly for private equity firms and banks who will have large portfolios of unlisted assets.

6. The lack of available ESG data is a major challenge for data providers and financial services firms alike

There is a disparity across industries, with better quality data available for higher carbon sectors, such as oil and gas, and a lack of data for other sectors, such as agriculture and forestry. The latter have not traditionally been heavily focused on CO2 output, but they must work to catch up in this new landscape. Data sets for less material sectors are being developed but are still immature.

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Chapter 2

Steps to success for using external ESG data providers

Four key steps will help financial services firms get the greatest value from external ESG data.

Using EY analysis and experience, we have developed four key steps that will help financial services firms get the greatest value from external ESG data:

Step 1: Internal and external ESG data assessment

  • Pull together use cases from different workstreams to understand and centralize requirements
  • Implement use case prioritization based on collected requirements
  • Look at internal and external data sources to see what best fulfils data needs for prioritized use cases
  • Select ESG data vendor assessment for compliance with data security and privacy requirements

Step 2: Data sourcing from select vendors/ internal sources and gap assessment

  • Identify any gaps and supplemental data needs
  • Identify additional internal/external data sources to fulfil supplemental data needs
  • Identify potential data quality challenges
  • Identify data transformation needs

Step 3: ESG data integration strategy and roadmap development

  • Build an ESG data strategy in alignment with enterprise data management policy
  • Develop a roadmap to integrate ESG data sources into existing data ecosystems for prioritized use cases
  • ESG data integration strategy should align with Enterprise Data Management policy with a focus on data quality and transparency into the data supply chain

Step 4: ESG data integration execution

  • Source and ingest ESG datasets from selected vendors for prioritized ESG use cases into the enterprise data ecosystem
  • Use existing data ingestion patterns and tools as necessary for ESG data sourcing based on vendor infrastructure
  • Define and apply preventative and detective controls to maintain enterprise data quality standards on data sourced from ESG vendors
  • Utilize existing regulatory standards as guiding principles to meet evolving regulatory needs
  • Transform data based on consumption use cases and to ensure compliance with data security and privacy requirements
  • Consume ESG data from authorized provisioning points in a unified data layer across the enterprise to ensure consistency

ESG data will underpin success

The importance of ESG data will increase in importance as regulatory requirements and investor demands evolve. The challenges around utilizing external ESG data are clear – selecting the right vendors, ensuring consistent use across the business and developing the right data integration strategy and execution.

Our comparative ESG data provider analysis shows the fragmentation of the market in ESG data vendors demands a concerted and careful approach. Looking ahead, it’s possible that ESG data providers could fall within the regulatory perimeter set by the EU. That would fundamentally change how nonfinancial data is accessed and how investors’ growing appetite for better ESG information and risk transparency is met. In the meantime, the caveat emptor rule applies to the assessment of external ESG data: the burden is on financial services firms to examine the available ESG data options and make the right choice for the various use cases. EY clients can draw on the ESG data vendor study to ensure their significant investments in systems and specialists are supported by the right ESG data.

Summary

Having the right ESG data is key to transparent and meaningful sustainable finance. Faced with fragmented data from multiple sources, financial services firms have responded by purchasing multiple data sets, overlaying these with their own analysis and developing their in-house ESG data capabilities. Still, as the demands for ESG data integration increase, knowing how a firm’s unique data requirements align with the various ESG data solutions in the market is crucial. The EY ESG data provider analysis provides detailed insights that support strategic, value adding ESG integration.

About this article

Authors
Mike Zehetmayr

EY EMEIA Financial Services Risk, Compliance and Regulatory Technology Leader

Leader in understanding the application of data in transition to a low carbon and sustainable economy. Fellow of the Royal Geographical Society.

Natalie Brandau

Senior Consultant, Consulting, Wealth and Asset Management, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

Focused on supporting wealth and asset management clients playing their role in creating a sustainable world. Passionate about sports, yoga, nature, books and life-long learning.

Contributors