In 2021, our world is driven by data. As the push for ESG measurement and disclosure grows, this truism is extending into the space as never before.
From radical innovations in tech to systems change and social impact, several key ideas are emerging to make sense of collecting, managing and reporting ESG data. Below are the top trends, as identified by speakers at GreenBiz Group’s GreenFin 21.
1. Demand for corporate ESG data is on the rise, and it's coming from just about everywhere
As the ESG ecosystem expands worldwide, demands for ESG data collection, analysis and disclosure are growing in number and depth. In the financial sector, they come from investors, creditors, insurers and asset managers who hope to understand how ESG performance metrics can benefit financial decision-making and risk management.
How ESG is used by financial entities depends on materiality and investment strategy; while some investors use data to rule out possible portfolio companies from the start, others apply it only to make a final buy-sell decision.
What we have now is a generation of consumers who really care about where they buy from, the products that they use, the value alignment with their personal principles.
Demand for ESG data is also growing among individual consumers and employees who increasingly expect information on corporate social and environmental footprints.
"What we have now is a generation of consumers who really care about where they buy from, the products that they use, the value alignment with their personal principles," said Keesa Schreane, global partner director at Refinitiv, of this phenomenon. "The scoring, the reports that are generated — they can gain access to this in a way that we couldn’t gain access before."
ESG data is also becoming critical in specific financial applications such as carbon markets, where transparency and credibility are paramount.
Finally, regulators are requesting ESG disclosure as never before. While most ESG legislation comes from Europe (with the EU’s recent Sustainable Finance Disclosure Regulation) speakers urged that the U.S. quickly will follow suit, especially with President Joe Biden’s ambitious climate agenda.
2. Stakeholders are ditching traditional ESG scores for in-house alternatives
Historically, financial actors relied on third-party, generalized ESG scores to simplify and quantify an organization’s performance across ESG topics, much like a standardized test for companies.
"ESG scores were a shortcut because we were all confused on how much data was coming in," explained John Hoeppner, head of U.S. stewardship and sustainable investments at Legal & Investment Management America. "Third-party groups started creating a score, which gave us all a first step of ‘is it an A student or a C student?’"
Today, this "black box" approach is quickly losing relevance as asset managers work to unpack those scores through in-house analysis. This gives managers more control over the data they use, reduces costs and helps support their unique investment hypothesis.
"As asset managers, we want to be able to defend that decision, so we are going to build it ourselves," Hoeppner said.
3. Now more than ever, ESG data is a collaborative, multi-channel sport
Both among creditors and individual companies, the need for collaboration across departments, levels and functions is gaining recognition. To efficiently use data, GreenFin speakers said organizations must weave feedback loops throughout a company’s infrastructure.
"Sometimes people consider the ESG or sustainability person as the one that is going to make it all happen, but if you’re doing it right, you've got all the right people in the company accountable for all of the different metrics, goals and targets," said Heidi DuBois, global head of ESG at communications firm Edelman. "It's really for the head of ESG to pull it all together."
Beyond collection, getting the right data into the hands of decision makers necessitates transparency and information sharing. Strategies such as sharing inclusive scorecards (which show ESG and financial performance metrics side by side) with corporate boards and creating employee resource groups (where members of diverse seniority and function meet to discuss ESG topics and data) can help increase both top-down and bottom-up ESG performance.
Investor-investee relationships are also changing, evolving into partnerships around ESG topics. Increasingly, investors are actively comparing and helping to improve the ESG performance of portfolio companies.
4. Future ESG disclosure won’t be wholly standardized — it will be a system
Currently, the ESG space is home to the infamous "alphabet soup" of frameworks, methodologies and standards, which makes it confusing for companies to efficiently collect, report or act on the right data.
Although initiatives from large international accounting bodies such as the International Financial Reporting Standards Foundation (IFRS) and the International Organization of Securities Commission (IOSCO) are attempting to bridge this gap, most companies reporting on ESG today use several standards in parallel, including the Sustainable Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP).
The important thing is that we are talking the same language. When we say one thing in one place, we should understand what people are talking about.
One reason for this fragmentation is the urgent state of ESG issues, especially those around climate.
"In a crisis response, it is very difficult to think strategically and about aligning everything before you respond," noted Adityadeb Mukherjee, head of climate risk management at the British Standard Chartered Bank.
Although some hope for singularity, GreenFin speakers stressed that a true global solution will be an interconnected system, similar to that of modern financial accounting, where key terms are defined and each player understands another’s role.
"Accounting standard setting works because companies and the accounting profession and investors allocate resources to participating in that process, and then they live with the outcome of it," said SASB CEO Janine Guillot.
"The important thing is that we are talking the same language," added John Scott, head of sustainability risk at Swiss insurer Zurich Insurance Group. "When we say one thing in one place, we should understand what people are talking about."
5. Like most things, the future of ESG data lies in tech
As ESG data becomes more complex, innovations in artificial intelligence (AI) and machine learning (ML) are helping make sense of traditionally qualitative data on topics such as diversity and climate risk. These digital tools gather complex information across documents, media and more to understand how ESG topics are valued and vested in a company’s strategy.
"The machine learning capability is to get all of this qualitative data. It's actually talking about your diversity program in recruiting, training, and networking in a lot of detail," explained Emily Huang, CEO at Idaciti, a software firm gathering data from corporate reports.
One new application of such a tool is in asset management, where managers are using ML-generated recommendations to swap out existing positions with more ESG-friendly ones.
AI can highlight inconsistencies in reports and consistently prioritize across data sources. For example, an algorithm may be programmed to value data from a 10-K report over information found in a marketing brochure, and thus can critically amass intricate data while maintaining its traceability and credibility. It also can provide a much more objective baseline analysis.
"The really cool thing is that AI and ML doesn’t build itself," said Hendrik Bartel, senior vice president at FactSet and co-founder of True Value Labs, an AI company helping investors pull ESG insights from big data. "If I have a result delivered by a computer, I would like to have a team of analysts decide whether or not we would come up with the same result."
Given the exact same background and data set, the inter-rater reliability of two analysts (their chance of reaching the same conclusion) is 80 percent; change just one variable, and this drops to below 40 percent. A "human in the loop" approach, Bartel argued, provides a more objective baseline analysis.
"AI’s job is to curate, organize, normalize, make comparable, but yet it is not going to make any decision," echoed Susanne Katus, vice president of brand and business development at Datamaran, an analytics platform monitoring ESG risk. "Give this to the end user, allow them to decide what matters to their decision making process."
6. The data is anything but dry when storytelling and purpose are paramount
Panelists at the green finance event touched on one recurring theme around ESG data: Form must follow function. Data and disclosure are meaningless unless they are aligned with a firm’s authentic purpose, values and strategies.
"One thing that should always stay the same is know thyself," Dubois of Edelman said.
If not, speakers warned, a company may risk losing control of its own narrative.
"The threat in this space is if you do not tell your story, someone else will tell it for you," said Hoeppner during his session. "You either disclose your data, or really smart algorithms are going to sell me that data. We as investors are doing that, consumers are going to do that and I am sure the media will as well."
For players in the financial industry, establishing a compelling, committed and credible story while avoiding greenwashing likely will require adding ESG data to core documentation such as 10-K and 10-Q reports.
7. The S of ESG will take center stage
Within ESG, the Social (S) piece is quickly gaining attention with new initiatives around diversity, equity and inclusion (DEI or D&I) and human capital, but is raising important questions around measurement.
"How can you measure D&I on a consistent, global basis?" asked Mark Gough, CEO of the standard setting initiative Capitals Coalition. "Is that even a concept that can be measured?"
Requests for both quantitative and qualitative information on social impact are also rising among consumers.
"They don’t want to see just a black box focused on emissions," Schreane said. "They want to know, what good are you doing in society? Who is at the table in terms of your board membership, your governance and your pay equity?"
Advances in human capital — the notion of viewing employee well-being as an investment — also will require a shift in perspective. Some progress is already under way, as the SEC mandates disclosure on human capital in quarterly or annual corporate reports.
"If we just moved [human capital] over to an investment, something we amortize over a period of time, how we see investing in our people and getting returns would change," said Gough.
8. There’s room to grow, with an emphasis on emerging markets and forward-looking data
Going forward, learning will be key. This is true both in established and emerging economies; smaller markets around the world can inspire advanced economies to set a good example and also serve as exciting examples of innovative regulation and standardization.
Good data requires good thinking.
Much learning also will need to take place on how ESG data can forecast future risks and opportunities. Unlike traditional financial disclosure, which predicts the future based on past performance, ESG data measures unprecedented challenges such as climate change and diversity, and so relies on innovative scenario-planning.
Several reporting standards such as SASB and TCFD support this future-focused approach, encouraging users to consider materiality and impacts over the next three to five years. Any new standards might look even further into the future.
9. It’s complicated, and it will take time
These major trends aren’t just a fad. They’re here to stay. But it could be some time until they are fully realized in the cohesive, collaborative system that people envision.
Specifically in the financial industry, adoption of efficient ESG data may go slow because of the inherent lead time between securing financing and when any positive ESG impacts, such as emissions reductions, take place.
Ultimately, as Dubois put it, "Good data requires good thinking." Speakers at GreenFin 21 certainly proved it, and instilled hope that we’re on the right track to get there.