HOW TO COMBATGREENWASHING?FIND THE RIGHT DATA PARTNERS

HOW TO COMBAT GREENWASHING? FIND THE RIGHT DATA PARTNERS

With global ESG assets expected to reach $53 trillion by 2025, on track to

represent more than a third of projected global AUM¹, investors are now

placing greater emphasis on company disclosures, ESG integration and

ratings agencies.

Portfolio managers and analysts have been integrating quantitative and qualitative analysis on ESG, rapidly

onboarding ESG rating data to establish internal processes and align with emerging guidelines. At the same time, due

to a lack of standardization of these regulations and guidelines, data vendors and asset managers are implementing

a combination of the global sustainable reporting frameworks with their own internally-built structures, potentially

causing confusion and risking opacity across the market. With spending on ESG data on the rise at an annual growth

rate of 20% and forecasted to approach $1 billion by 2021², how should fund managers choose their data providers?

Asset Managers Going Straight for Incumbents but Open to New Entrants

By the end of 2016, the Global Initiative for Sustainability Ratings had counted more than 125 ESG data providers in

the market. In 2018, there were more than 600 global ESG ratings and rankings. ³Demand for ESG-related products

has skyrocketed, leading to a proliferation of participants in the ESG ecosystem attempting to supply differentiated,

reliable information to meet this demand.

These data providers can be categorized into: generalist data vendors (Bloomberg or Thomson Reuters),

ESG-focussed (Sustainalytics or Truvalue Labs), credit rating agencies (Moody’s, S&P and Fitch), and asset managers

(RobecoSAM or Arabesque).

Established and traditional data providers are often the go-to for asset managers looking to quickly establish

credibility in the market. IHS Market’s⁴ 2019 study saw a greater usage in incumbents like Sustainalytics (cited by 53%

of the 85 buy-side firms surveyed) and MSCI (44%), and in 2020, SustainAbility confirmed that these two providers

are favored for their broad coverage. However, a single go-to rating for all investors has yet to be established and buy

side firms are looking to identify and portray their own ESG-based comparative advantages and specialisms, and

asset owners are becoming more demanding and analytical in their assessment of their asset managers’ expertise.

This all provides a growing opportunity for smaller providers with niche data or differentiated processes to penetrate

the market.

The Substantive Research ESG Dashboard

Substantive Research has developed an industry-first, ESG Data Provider Dashboard that provides a searchable

database of more than 140 ESG data providers, mapping out the ESG data market and showing the choices available.

This gives clients the opportunity to discover and compare suppliers of ESG data all in one convenient place.

A rich and diverse ESG ecosystem of over 300 data vendors was analysed through multiple sources, including direct

1-on-1 interviews with over 200 potential data vendors to construct a database of high quality providers, including

those new to the market, as well as the longer-standing firms.

The dashboard contains information on:

Niche specialisms categorized into Environmental, Social and Governance

Themes under each ESG category (e.g. GHG emissions, biodiversity, pollution, gender/balance equality, health

and safety, supply chain, shareholder rights, audit practices, board independence and oversight, etc.)

Data formats used

Geographical and regional coverage

Frameworks implemented (e.g. SASB, UNSDG, TCFD, SFDR, GRI, etc.)

Number of data points and metrics, and the frequency of updates

Product type (e.g. AI, Geospatial/Satellite, SAAS, Alternative Data, Direct Engagement)

Summaries of who each company is, what differentiates them against competitors and insights on what the

company can offer to Substantive’s clients.

The dashboard places a spotlight on different providers with unique thematic specialties to cater to the

quickly-evolving demands of the financial market, while simultaneously helping clients navigate through the vast

world of ESG ratings and data products providers.

Data from the current Substantive Research ESG Dashboard shows that:

Start-ups (1-5 years in existence) already make up over a third of market supply, some 39% of our list, while

Mid-level (started 6-10 years ago) and Established firms (started 10+ years ago) make up 24% and 37%,

respectively. Technological advances such as artificial intelligence and machine learning have led to an increase

in new providers. Meanwhile, new product launches from both existing and newly-established providers are

expected to speed-up in response to market demand.

53% of the providers are generalists, in the sense that they provide all three Environmental, Social and Governance

(ESG) data to clients while only 33% specialize in ‘E’, ‘S’, or ‘G’ only. As the ESG process within asset managers

evolves, shopping for data is likely to increasingly target specialists, as buy side firms look to create their own

‘special sauce’.

Of these specialists, just 5% are targeted towards Social, 70% specialize in Environmental and 25% in Governance.

Startups and Incumbents in the driver’s seat of the ESG industry

Data providers split into generalists and specialists with ‘E’ and ‘G’ speeding ahead of ‘S’

New market participants entering the ecosystem39% of the ESG market is supplied by newly launched firms with under 5 years of existence

Data incumbents not far behind in ESG offerings37% are established firms with more than 10 years of experience who developed their own ESG products.

Providers prefer to be generalists on E, S, G53% of the market are generalists across Environmental, Social and Governance and 33% specializes in only one area.

‘S’ lagging behind ‘E’ and ’G’Only 5% of specialists are focussed on Social, with the 70% focussing on Environmental and 25% on Governance.

2 Specialisms14%

Specialists33%

Generalist53% Environmental

Only70%

Social Only5%

GovernanceOnly25%

37.0%

24.2%

39.0%

0 10 20 30 40

Established (10y +)

Mid Level (5 - 10y)

Start Up (1 -5 y)

The data formats and delivery channels vary widely, as does latency and transparency in methodologies.

Tracking, tagging and illustrating these variations now allows comparisons and short list creation for clients

trying to understand market supply in specific areas quickly.

70% of the providers have developed their own framework in combination with one or more of 20 other global

sustainable reporting standards.

Highlighting the noticeable difference in specialisms within the data providers, recent regulatory requirements

released by the EU and other government bodies played a significant role in the buy side focusing on environmental

impacts. Equally, stakeholders have always been focussed on good governance in order to “future-proof” their

investments, so the evolution in ‘G’ has also been unsurprising.

In comparison, social issues are often difficult to measure and disclose, and until recently have lacked the urgency

associated with 'E' and ‘G’, pushing ‘S’ to the background. However, with the scale and depth of the COVID-19 crisis,

socially-related business practices have been brought to the forefront with conversations about equality, human

rights, labour rights, and product safety and quality rapidly emerging. During the year 2020 alone, social bonds

jumped nine-fold to $165 billion from 2019 in a global collective effort to fund different social causes like healthcare,

housing, socioeconomic advancement and other related projects to get everyone back on track after the pandemic.

Many providers will no doubt be observing these dynamics and will consider putting ‘S’ further to the forefront of

their efforts, and the Substantive Research dashboard will track these trends over the coming months.

Just as the majority of the providers implement their own internal in-built frameworks, data shows that this trend is

also mirrored on the buy side, with shareholder advisory firm SquareWell Partners showing that 60% of the largest

asset managers have developed in-house ESG metrics and ratings. This is arguably a reaction to the constantly

changing standards being set for disclosures and information. Implementing an internally built framework may help

providers and consumers of ESG data to meet investor expectations in the short term, but unfortunately also leads

to the current issues in transparency and consistency.

Transparency and Consistency

Aside from the issue of varying methodologies and frameworks, public data disclosed by corporations also lack

comparability due to the differences in the definition of materiality. On the data vendor side, firms seem to closely

guard their ‘special sauce’ - the methodologies they use to sustain a competitive advantage in their industry.

In an attempt to solve the pressing issues on reliability, relevance and consistency, the Board of the International

Organization of Securities Commissions (IOSCO) published a Consultation Report on ESG Ratings and Data Products

Providers in July 2021. Two recommendations are noticeable: they suggested that ESG ratings and data products

providers be highly transparent in their methodologies and processes while maintaining the confidentiality of all

non-public information.

They expect this to result in “...the data providers issuing high quality ESG ratings and data products based on

publicly disclosed data sources”. They also suggested users should conduct their own due diligence on the ESG

products being incorporated in their internal processes - “This ensures that the data being ingested are holistically

accurate on both sides.”

This would seem to put regulators at odds with the existing business models, potentially requiring an overhaul of

current structures of ESG data providers. However, some niche firms are already showing that transparency and

comparative advantage can be achieved simultaneously.

During Substantive’s due diligence process, a number of data firms have shown the way ahead in ensuring that their

datasets drive the insights required by the buy side, whilst demonstrating transparency. They include:

The market is understandably focused on the challenges represented by greenwashing, as companies endeavour to

give the right impression regardless of their true underlying commitment to these issues. As asset managers

establish their new ESG processes and assess their requirements for ESG data, Substantive’s ESG dashboard is

helping them discover which providers’ methodologies provide sufficient transparency and an accurate view of the

ESG Analytics, a research company using data science and domain expertise, which blends custom

research with academically derived data to help analysts cut through the possible risks of funds misuse.

Riskthinking.AI, a leading provider of Climate Risk Data currently holding 60,000+ geospatial datasets,

which tracks data directly back to the source, which helps identify how the data was modified and manipulated.

Evalueserve, which utilizes alternative data to capture real-time news and controversies to provide a

comprehensive view of a company and its ESG efforts.

Management & Excellence, which specialises in calculating and raising the ROI of human capital,

quantifying upsides and downsides to make investments and projects more transparent. The model can

quantify any process, from corporate governance to CSR, substantiating corporate claims of sustainability.

integrity of company reporting, to the ultimate benefit of their clients. With a rapidly growing but unregulated market,

more clarity on how ESG data are being collected, developed and utilized can only lead to better identification of key

partners, and therefore more informed investment decisions.

¹Adeline Diab and Gina Martin Adams. “ESG assets may hit $53 trillion by 2025, a third of global AUM”. Bloomberg. February 2021.

www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum

²Anne-Laure Foubert, 2020-03-09, “ESG Data Market: No Stopping Its Rise Now”. Opimas. March 2020. www.opimas.com/research/547/detail/

³Christina Wong and Erika Petroy. “Rate the Raters 2020: Investor Survey and Interview Results”. SustainAbility. March 2020.

www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/sustainability-ratetheraters2020-report.pdf

⁴Brian Matt. “ESG Buy-Side Integration: Then & Now”. IHS Markit. January 2020.

cdn.ihsmarkit.com/www/pdf/0720/Buy-Side-esg-integration.pdf

⁵Ahren Lester. “Sustainable Bonds Insight”. Environmental Finance. February 2021.

www.environmental-finance.com/assets/files/research/sustainable-bonds-insight-2021.pdf

⁶Garnet Roach. “More than half of top 50 asset managers developing internal ESG ratings”. Irmagazine.com. March 2021.

www.irmagazine.com/buy-side/more-half-top-50-asset-managers-developing-internal-esg-ratings

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