Data Challenges Behind ESG Investing

Asset managers are spending more on ESG data than ever before, as the demand for sustainable investments continues to increase year-over-year. In fact, according to a recent Index Industry Association global survey, asset managers expect nearly two-thirds (64%) of investment portfolios to contain ESG elements within a decade, compared to just 52% in 2021.[1]

However, asset managers are facing challenges related to ESG data that are preventing them from taking full advantage of the opportunities ESG investing has to offer. These challenges include:

• Inconsistent Rating Frameworks

The absence of a single, globally aligned rating framework still remains one of the biggest challenges for the industry. Most of the ESG data providers develop their own sourcing process and rating methodology. Because of this, there is often a very low correlation between their ratings of companies.

• Lack of Standard Reporting Regulations

Since there are no mandatory reporting standards set for companies when it comes to the disclosure of ESG performance data, it becomes quite challenging for investors and funds to make decisions based on the information that is available to them. Evaluating companies’ performance based on publicly available data causes difficulty in tracking all metrics and eventually increases the risk in ESG investing.

• Inability to Validate Data

There is no authorized system or body to verify reported ESG data, and there’s also a possibility of greenwashing by some companies. This lack of auditing questions the reliability of disclosed information. However, if the reported information were to be verified by an authorized party or auditor, ESG data transparency would significantly improve.

• Absence of a Single Source of Truth

ESG data is reported across multiple platforms like company websites, emission disclosures, corporate sustainability reports, annual reports, etc. This makes sourcing and analyzing data quite tedious and error-prone, forcing funds to rely on rating agencies’ ESG scores rather than their own research.

• Hidden Insights

There is no use in gathering information if it does not provide actionable insights, which is why funds need to be careful while choosing an ESG data management solution. The solution should be able to streamline the application of the collected ESG data across critical use cases and should have advanced analytics in place to assist with improved decision-making.

Closing the ESG data gap would require more standardized frameworks and regulations. With an increase in the scale of ESG investing, changes like mandatory ESG disclosures, data validation frameworks and a standard rating methodology could soon be introduced to tackle these challenges. Until then, funds and asset managers need the right tools to help them navigate through the ever-evolving ESG landscape.

IVP ESG Management is strongly positioned to help asset managers establish a reliable framework for ESG investing that supports accurate and efficient portfolio construction, asset allocation, risk management and compliance, and regulatory reporting.

For more insights on the challenges of ESG data, watch Indus Valley Partners’ joint webinar with the Alternative Investment Management Association, ESG Data – finding efficiencies in sourcing, managing and reporting, or visit https://www.ivp.in/products/esg-management/.

[1] “IIA’s Second Annual ESG Report of Asset Managers Sees Strong Growth,” Index Industry Association, July 28, 2022.