Editorial note: This is the second in a three-part series of articles brought to you by BNP Paribas Securities Services
Inconsistent ESG data that is hard to compare and apply to determining risk and return is one of the oft-cited challenges to further adoption of ESG.
With more investors integrating ESG into their investment decision-making process, the challenge of data remains pressing, but there is reason to believe that further consolidation of reporting frameworks may enhance transparency, whilst service providers are helping investors coordinate and integrate ESG data into their operations.
A significant majority of Australian investors believe inconsistent data quality is one of the top five hindrances to ESG adoption, according to BNP Paribas' recently issued ESG Global Survey 2021, which examined the appetite of 356 asset owners, official institutions and asset managers, including participants from Australia. The survey found that 71% of Australian respondents cite inconsistent data quality across asset classes as one of the top five hindrances.
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Fewer investors in Australia report challenges around data quality and consistency - (57% vs 77% APAC; 78% globally), but Australian investors are more likely to find that conflicting ESG ratings are an issue - 68% in Australia say conflicting ESG ratings are an issue, compared to 67%) say the same globally and 49% in APAC.
When it comes to climate change risk disclosure, the Task Force on Climate-Related Financial Disclosures (TCFD) is the emerging consensus structure for disclosure, with more jurisdictions adopting TCFD. Further, the International Financial Reporting Standards (IFRS) Foundation announced at COP26 the creation of the International Sustainability Standards Board (ISSB), which will develop a comprehensive set of sustainability disclosure standards that accounting professionals say would be a critical step to harmonising a fragmented reporting landscape.
Q&A with Nadim Jouhid, head of investment solutions at BNP Paribas Securities Services Asia Pacific
Q: How big of a challenge is ESG data fragmentation?
A: On a global basis, there are about 50 ESG data providers and this naturally creates a challenge for clients as they start to ask many questions, such as to which one they should use and why.
The next challenge is data consistency. Take carbon footprints for example, if you use MSCI and you're comparing the carbon footprint data from Trucost, why would they have different views on the companies you invest in?
The reason is most of the data/rating agencies specifically look at emissions from a sectoral perspective. They will say, for example, the mining industry has a certain type of rating whilst the IT sector has its own specific rating. However, once you start isolating the rating from a sector to a specific company's profile, this is where each agency applies their own differing methodology.
We know that most of this data is derived from company interviews. Whilst this process works well, certain aspects have the potential to get lost in translation. Especially if the agency conducting the interview is based in a different country to where the company being interviewed is based in.
Then there's timing. Companies provide information on sustainability once, maybe twice a year. That creates a data discrepancy between major agency providers.
Q: How do you address the challenges of fragmented data sources?
A: On average clients are using a subset of ten to 12 data providers. This brings two key challenges, in my opinion.
Firstly, in order to effectively integrate the various data providers into any investment process, there needs to be a solid backend system for the aggregation of data. Secondly, that data needs to be applied and available for analytics. This is especially important as more and more fund managers are building in-house ESG research teams.
To provide that level of flexibility, we have launched a new offer focusing on open ESG architecture so that clients can pick and choose their own datasets. In future, we will look at integrating new fintech companies that are using machine-led learning for ESG datasets.
Q: What do APAC clients use data for?
A: Currently the drivers are different between Europe and APAC. Most European investors are looking to make sure that they have an internal capability to deliver on regulatory reporting.
In APAC however, investors are still looking to see how they can integrate data into their investment process to help with ESG stock selection. We tend to see a lot of questions about regulation at the beginning of our conversations with clients. Once that is covered, the discussion turns to what tools can we provide to help internal ESG teams make investment decisions beyond that of negative screening - positive screening is becoming more popular with APAC investors.