ESG Data: A Crucial Cog In The Sustainability Wheel

Oliver Platt

Oliver Platt

Product and Marketplace Manager

The unprecedented risks of climate change and the rise of conscious consumerism in the post-pandemic era have made industry stakeholders and policymakers realise the importance of businesses prioritising ESG practices. The signing of the Glasgow Climate Pact and agreeing on the Paris Rulebook at the COP26 summit further signifies a global commitment toward a carbon-neutral future. As sustainability becomes the focus of the global economy, financial institutions (FIs) have joined the phenomenon by announcing a wave of initiatives such as net-zero pledges, zero thermal coal exposures, incorporating sustainable business practices into their business strategy, and committing to disclosures around climate-related risks and opportunities.

In the last 18 months, the largest 30 lenders by assets in the U.S., Canada, and Europe have all signed up to the industry-led, UN-convened Net-Zero Banking Alliance. These net-zero pledges have a significant bearing on FIs’ lending and investment portfolios and warrant them to ensure that the greenhouse gas emissions linked to their lending and investment portfolios are tracked and reported to internal and external stakeholders. FIs also need to optimise their lending and investment portfolios to deliver long-term sustainable investment returns for clients and roll out products and services that comply with the ESG criteria.

The Data Disconnect

At the core of these sustainability initiatives, financial institutions have to deal with the ESG data challenges. Unlike financial data, ESG Data currently does not have generally accepted principles and limited accessibility, and the inconsistency of ESG data further exacerbates the ability to verify and validate the ESG metrics reported by enterprises. Several ESG data platforms, ESG startups, and consortiums have stepped in to fill the ESG Data gap.

ESG data comes in various shapes and forms. FIs need to potentially collect hundreds of datasets from internal and external sources in different formats and data types. Moreover, there is a lack of standardisation in different reporting frameworks for companies to capture, track and disclose ESG-related information. The fragmented reporting landscape, lack of obligation to report ESG data, and self-reporting procedures open up the possibility of ‘green-washing’ — a marketing spin involving unsubstantiated claims about environmentally-friendly practices.

In addition, ESG data about enterprise behaviour is in constant flux. Even though regulation is evolving rapidly, for many organisations, even compliant ESG reporting and disclosure may not be sufficient to meet sustainability imperatives. Over-reliance on historical information and the lack of standardised data have forced FIs to look elsewhere in search of robust real-time data sets. Real-time data sources such as negative press articles, enforcement actions by regulators, product recalls, social media trends, etc., allow financial institutions to make more informed and sustainable investment and asset management decisions. And finally accessing and analysing the carbon footprint of the entire value chain in which the firm operates makes ESG data a Big Data problem.

A hybrid approach to accessing Quality ESG Data

In search of accessing transparent and reliable ESG data, FIs have undertaken a hybrid approach to ensure efficient collection, analysis, and reporting of ESG data.

On the one hand, global FIs have strengthened their in-house capabilities by developing state-of-the-art analytics solutions and hiring leaders to drive enterprise-wide sustainability initiatives. On the other hand, FIs have also collaborated extensively with ESG Data providers, Technology Service providers, and consulting and advisory firms to accelerate their ESG journey. Some of the large FIs have also invested and acquired ESD Data platforms to complement their in-house ESG product development programs.

Financial Institutions Collaborate with ESG Data partners to drive sustainability themes

In the UK, HSBC led one of the biggest disruptions in the ESG industry, with their asset management arm first collaborating with climate change advisory firm Pollination in 2020 and then taking a minority stake in Radiant ESG, a US-based ESG and diversity and inclusion focused consulting firm the following year. With Pollination, HSBC aimed to create an asset management venture focused on “natural capital,” — seeking to put a value on resources such as water, soil, and air to help to protect the environment. Along with Deutsche Bank and Swiss Re, HSBC also announced their support for ESG Book, a new ESG data platform with an ambition to ‘disrupt’ the market with a free “public good” service for companies and investors.

In the US, in September 2020, Citi announced a partnership with Truvalue Labs, a pioneer in AI-driven ESG data, to accelerate its ESG research initiatives, analyse company ESG behaviour at scale, and monitor public company performance against sustainability criteria by leveraging Truvalue Labs’ data. In November 2020, another US investment bank, JPMorgan, partnered with ESG data science specialist RepRisk to incorporate ESG risk metrics within its in-house data platform. The data was made available via JP Morgan’s DataQuery platform to clients across its trading and securities services businesses with access to ESG risk data from over 150,000 companies. In Nov 2020, Germany-based Deutsche Börse acquired 80% of ISS, a leading ESG data and analytics provider.

2021 saw a flurry of activities as regulations tightened and financial institutions came under increased scrutiny from the watchdogs and consumers alike. In March, BNP Paribas announced an alliance with sustainability data provider Clarity AI. The move facilitated users of the Manaos platform, BNP Paribas’ fintech subsidiary, with access to Clarity AI’s library of sustainability data. Manaos also partnered with Util and MoOdy’s V.E. to leverage Util’s machine learning models and utilise V.E. ’s data scores and assessments.

State Street teamed up with S&P Global Trucost to allow the bank to overlay Trucost’s data intelligence on the risks and opportunities of climate change. BlackRock entered into an agreement with Baringa Partners to acquire and integrate Baringa’s industry-leading Climate Change Scenario Model into BlackRock’s Aladdin Climate technology. JPMorgan wasn’t far off from the limelight as well, as it announced the acquisition of OpenInvest, a financial technology company that helps financial professionals customise and report on values-based investments. Blackstone acquired Sphera, an environmental, social, and governance (ESG) software, data, and consulting services provider, from private equity firm Genstar Capital in a deal valued at roughly $1.4B.

In 2022, Goldman Sachs and Santander were quick to grab headlines. While Goldman Sachs invested in GridPoint, a leader in building energy management and optimization technology that decarbonizes commercial buildings and drives grid modernization, Santander acquired 80% of ESG consultancy, WayCarbon. U.S. Bank partnered with Sustainalytics, a leading global provider of ESG research and ratings, to offer ESG data solutions to U.S. Bank Global Fund Services clients. In February 2022, JPMorgan Asset Management partnered with a third-party forensic data provider to calculate supply-chain risk to its investments. The forensic data provider helped JPMorgan examine soil samples to ascertain if cotton used by clothing companies had been made in blacklisted countries.

A data-driven outlook for ESG initiatives

Sustainable practices have gained a lot of traction over the past few years as ESG has become the priority across every industry. The emergence of the ESGTech ecosystem in this space has led to the development of new technologies to tackle the ESG data challenges. From utilising real-time data by leveraging AI and machine learning capabilities to implementing blockchain technology, FIs have taken proactive steps to create a carbon-neutral future.

Embed ESG Data in sustainability initiatives with NayaOne

NayaOne offers an ESG Marketplace with pre-vetted ClimateTech and ESG Data providers for financial institutions to quickly discover and onboard for innovation projects. It also offers an integrated Innovation platform and Synthetic ESG datasets to aid rapid experimentation, evaluation benchmarking, and launch of sustainability propositions to customers.

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