What makes quality ESG data?
What makes quality ESG data?
Investor appetites for ESG (Environmental, Social, Governance) focused companies are rapidly increasing. A recent US SIF reported ESG investing strategies increased 42% in the last two years to $17 trillion in 2020 (up from $12 trillion at the start of 2018). This increase means both investors and regulators are beginning to pay close attention to company sustainability-related disclosures and data.
While investors rely on quantitative ESG data to identify leading sustainability-focused companies, the lack of reliable, consistent reporting inhibits actionable, informed investment decisions. In a nutshell: for investors, a company’s ESG performance is only as good as its data quality. However, the lack of consistent ESG reporting standards presents a problem for companies and investors alike.
ESG statistics are often qualitative, discretionary, and unregulated, meaning investors spend excessive amounts of time trying to interpret unstandardized data, which slows investment growth. There are multiple issues contributing to this problem. A lack of standardized reporting, inconsistent data reporting metrics, variable scoring systems, divergent data points, and complex communications all contribute to a chaotic data system.
In this unregulated world of reporting, how can companies provide quality ESG data that supports their investor and stakeholder needs?
Quality ESG data = standardized data
For many companies, meeting investor and stakeholder demands for quality ESG data is challenging given the profusion of reporting platforms, standards, and requirements. As the need for data requirements grows, certain reporting standards are becoming more widely embraced, and companies should take note.
In 2020, the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework became mandatory for signatories to the UN Principles of Responsible Investing (UNPRI) and is expected to become required in the United Kingdom, New Zealand, and possibly the U.S. in the next few years. SASB has made positive progress in creating reporting standards and recently released 77 industry-specific accounting standards to help investors understand how material sustainability issues can impact a company’s financial performance. Lastly, SASB and the Global Reporting Initiative (GRI) standards are currently utilized by 75% of the world’s 250 largest companies. And it’s worth noting that both TCFD- and SASB-aligned reporting were recently nominated for the gold standard of ESG reporting by BlackRock’s Larry Fink.
Beyond benchmarking, companies and investors need to account for regional and sector differences to avoid unfair comparisons as well as consider skewed data that doesn’t fit well within normal distributions. The lack of standardized data means different data points can be reported by companies within the same sector, some ESG information is only partially measured and accounted for, and the data shared by companies can vary from year to year.
Companies will do best by choosing a leading reporting standard, standardizing the data that is relevant to their sectors and peers, and delivering that data in a consistent, research-ready data set.
Quality ESG data = consistent scoring
Not only are ESG reporting standards unstructured, but the ESG scoring system is also inconsistent. ESG scoring seeks to provide a single metric that investors can use to evaluate companies on a range of ESG issues. While these scores provide a system for easy grading and evaluation, the scoring data is opaque at best. ESG scores are often used as a one-size-fits-all system that unequally weights certain ESG factors with immaterial data to determine the cumulative ranking.
To address this data challenge, many investment management firms are assigning their own scores to public companies. This allows investors to weigh different factors based on the information they believe will have a significant impact on each sector, industry, or company.
Ultimately, for data to be usable to investors it needs to be reliable. Reported sustainability scores need to accurately reflect what is going on within a company.
Quality ESG data = consumable data
Reporting standards provide actionable, material reporting data, which is good. However, this information can also overwhelm investors and makes the need for clearly packaged, consumable data paramount to success. A study from Danske Bank of the 100 largest Nordic company ESG reports found roughly 21,000 different data points, of which only 1,000 overlapped. From this research, they recommended breaking down ESG disclosures into four areas:
- Financial materiality: Data that reflects what is important to the company
- Comparability: Data that is comparable across companies and industries
- Accessibility: Data that is accessible to investors in different formats
- Reliability: Data that has high quality assurance
Companies can take control of their ESG data narrative by proactively choosing disclosures instead of being overwhelmed by survey requests. To do this, companies can work on setting a reasonable, customized baseline of standardized ESG metrics with industry peers to achieve comparability.
When reporting ESG data, companies can follow these steps:
- Identify the range of stakeholders impacted by and impacting your company.
- Map the material sustainability issues surrounding your business relevant to those stakeholder groups (i.e., carbon emissions, gender diversity, etc.)
- Understand the relative importance of these issues to your stakeholder groups and how best to report the relevant data.
- Strategize what your ESG management framework looks like including key ESG issues, performance metrics, targets and initiatives, and reporting standards and frameworks.
- Gather the internal resources, teams, and data required to meet your ESG reporting needs.
- Externally report your ESG performance using your ESG management framework.
- Continue to improve your reporting process by engaging stakeholders, gathering feedback, and keeping abreast of the current sustainability issues impacting your business.
Transparency & timeliness
Ultimately, a high-quality process should include current, accurate data, transparency in score construction, and the ability to deliver data in a clear, timeline manner. For sustainable investing to grow, all parties (investors, companies, and stakeholders) must work together to improve the accessibility, reliability, and standardization of ESG data. Company sustainability disclosures need to be anchored in sound governance, management, and performance systems and communicated with transparency and clarity. This process ensures trustworthy, quality data.
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.