What Investors Want from Sustainability Data

Investors increasingly view global sustainability challenges as material to long-term financial performance, as the visible impacts of climate change—extreme heat, droughts, floods and sea level rise—become ever clearer. But do they have enough information to manage the risks and capitalize on the opportunities of a world in transition?

To account for the effects of a world in flux, more investors are pursuing strategies that consider relevant environmental, social and governance (ESG) factors, an approach known broadly as sustainable investing. In 2017 alone, assets managed through such an approach increased by 37 percent, according to Bloomberg.

Despite the swell in interest, sustainable investing is by no means a matter of course for capital markets. Key barriers, including well-documented limitations with ESG data, prevent true scaling and mainstreaming.

But what exactly do investors need from the data? To further explore the most pressing needs, we set out to scan the state of the market. After reviewing the latest literature, we held a series of conversations with investment practitioners. We spoke with more than 30 practitioners from 25 firms, including institutional asset owners, pension fund managers, asset managers, investment advisors and data firms, that collectively manage $5.2 trillion in assets. The composition of the sample leaned towards practitioners with a general interest in sustainable investing, making it a group well positioned to consider the key data challenges facing the sustainable investing market.

Through these conversations, which we documented anonymously to encourage candor, we gained a more nuanced perspective on investors’ sustainability concerns and the limitations of existing data. While there is growing attention to getting better data and more robust, standardized company disclosures, it will take a wider set of actions under a multifaceted approach to meet investors’ data needs. This collective effort will be an important step in harnessing the power of markets for sustainable change.

WRI is exploring how to contribute to this effort, and fortunately, we are not alone. Research groups, foundations, associations and forward-thinking asset owners and managers are all seeking ways to solve this challenge.

We hope by sharing our perspective, informed by both our research and our experience as an asset owner, we can help bring more focus on data solutions.

Diving into the Data but Coming Up Short

Just as investors use traditional financial data to evaluate business performance, they use ESG data to evaluate the sustainability context of investments. ESG data include any indicators that shed light into the sustainability context of an asset, facility, company or region, whether historic, current or expected.

Investors, for example, may use ESG data to assess environmental matters like annual carbon emissions, regional water stress or whether a company has an emission reduction target. Under the social umbrella, ESG data covers issues like workforce diversity, gender equity and human rights, while data on governance topics tracks matters like corruption, labor practices and gender composition of the board.

Depending on the investment objectives, this data can inform various stages of the investment process, including asset allocation, security selection, portfolio construction and risk management. The additional layer of information can reveal material risks and opportunities that are otherwise overlooked in investment decisions, helping to identify investments that may lead to enhanced risk-adjusted returns and reduced downside risk.

ESG approaches are most widely applied in public equity assets, though there has been increasing attention in other asset classes, particularly fixed income.

Where do investors get this data?

Most ESG data comes from companies’ public disclosures. Companies disseminate this information through a number of outlets, including annual reports, social responsibility reports and ESG disclosure surveys from data agencies like CDP. Investors can and do get relevant information directly from these sources. Third-party data providers also collect and aggregate these data, along with data from other sources. The providers serve as a centralized access point for data (see chart below), offered through fee-based subscriptions.

The offerings vary widely across providers, with some taking a specialized focus and others covering a range of ESG issues.  Providers use their own proprietary methods to process and standardize the data into a suite of metrics, scores, ratings, rankings and indexes to enable easier comparisons among companies.

More than half of the investors we spoke with said they subscribe to multiple providers to benefit from their unique comparative advantages.

The type of data investors use varies according to the investment strategy as well as the internal capacities for sustainability analysis. Those new to sustainable investing often use ESG scores as an entry point. More sophisticated investors may construct their own metrics or analysis using raw ESG data. Indeed, this reflects the evolution of our sustainable investing strategy with WRI’s endowment.

While sustainability data is helpful in informing investment decisions  Read more,….