As more investors pursue strategies that consider relevant environmental, social and governance (ESG) factors, they look to data to inform the investment process. A new World Resources Institute analysis found that investors still face significant sustainability data challenges.
WRI associate Ariel Pinchot and senior associate Giulia Christianson, who heads sustainable investing for the global research nonprofit, spoke with more than 30 practitioners from 25 firms, including asset owners, pension fund managers, asset managers, investment advisors and data firms, that collectively manage $5.2 trillion in assets.
The authors distilled those conversations into a commentary called What Investors Want from Sustainability Data.
“The biggest challenge with the data is that information is not reported in a standardized way,” a sustainability asset manager told the authors. “It’s better than it used to be, but still not great.”
Here are the main data limitations investors told Pinchot and Christianson that they face around sustainability data:
- Poor coverage across holdings: The available data are incomplete, making accurate assessments across a portfolio difficult. Despite overall progress, most global companies still do not publicly disclose data on key environmental issues. “Our conversations suggest that the gaps are biggest for fixed income assets, small cap companies, and emerging market companies,” the WRI authors concluded.
- Inconsistent reporting metrics: The fact that sustainability reporting is voluntary makes for messy data. Neither the metrics nor the accounting methods are consistent. “This limits comparability across companies and remains one of the greatest limitations to sustainability data,” the writers found.
- Poor quality, immaterial: Investors have substantial doubts about the quality of sustainability data. Most disclosures come through as check-box yes-or-no responses, generic boilerplate language or tailored narrative, rather than robust quantitative performance indicators, such as metrics on energy intensity or water consumption.
- Inconsistent evaluation with limited transparency: The ESG scores, ratings and rankings from data firms are of questionable validity. The methodologies for normalizing the reported data carry different assumptions about what is material. As a result, there is low correlation between company evaluations across providers.
“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,” the authors wrote. “This collective effort will be an important step in harnessing the power of markets for sustainable change.”
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