A continued lack of standardization is driving third-party ESG (Environmental, Social and Governance) data providers inventing their unique designed ESG framework for ESG evaluation. ESG Data providers are empowered with increasing force in markets as ESG thematic investing gains more attractions, especially since COVID-19. However, data quality about companies’ ESG practices vary and could directly has a crucial impact on effective investment analysis. As some of these ESG data providers provide important insights on ESG Ratings and assigning metrics of the underlying assets which influence investment decisions.
In the near term (3-5year): Institutional investors face myriad challenges. Regulation, disruptive technology and heightened volatility are all on the agenda. And part of the solutions to these challenges are data. In a recent survey conducted by MSCI, 79% investors use climate data to manage risk sometimes or regularly, and 64% investors sometimes or regularly use climate data to identify opportunity. A revolution in data usage is seen as a solution to many problems, from regulation to increased public pressure for transparency. Climate data is at the center of the revolution. As recent statistics by BlackRock shows, over the past year – a 363% increase in SASB (Sustainability Accounting Standards Board) disclosures and more than 1,700 organizations expressing support for the TCFD (Task Force on Climate-Related Financial Disclosures).
ETF Stream defines the ESG ecosystem with three groups of key players – the data providers, data consumers (e.g., the asset managers and index providers), and the asset allocators. Data providers are at the center of the debate when it comes to filling the ESG data gap for the upcoming Net-Zero commitments vowed by 127 governments collectively responsible for more than 60% of global emissions. Research from CFA institute last year points out the importance of recognizing how company reporting plays a key part in the sourcing of ESG data. But in sustainable investing, there are areas where regulations and standards are still developing. Although many practitioners see substantial opportunity for standards to play a bigger part with better data. However, one-quarter of these responding practitioners still unsure about how the data challenge will be resolved much as we discussed in our precious report.
ESG Data source
For investors, ESG data is part of alternative data for predicting the stock market trends. It gains more attention from businesses actors these days. For them, managing ESG performance and actively disclosure their ESG data become essential move for business reputation and sustain value creation, and even a growing mandatory requirement in certain markets.
ESG data reflects not only the sustain performance of the underlying asset but the potential volatility and financial risk it bears. That said, one of the ESG data sources is voluntary or mandatory reporting by the company itself.
The data quality from self-disclosure could be subject to biased. Hence, investors tend to get ESG data from a diverse source instead of taking them at face value. As data gathered from a variety of sources can help to ensure the data quality and reduce some risk of hidden information if not all. Vendors are keen to compete with more sophisticated machine learning algorisms or even AI and with more high-frequency data updates.
These data are collected from three main sources: either it is from inside, by self-reporting ESG statistics, or outside source by third-party ESG statistics and real-time ESG signals such as the news feeds, etc. Investors could get overwhelmed by the variety of ESG sources, and ESG data vendors are in the business of making sense and organize these ESG data world.
ESG Thematic Investment Ecosystem
In the Chinese exchanges, one quarter of companies issued ESG reports in 2019, likely over a third did so in 2020, and domestic ESG rating schemes such as the one by Ping An and the China Economic Information Service (CEIS) have launched as reported by McKinney. Demands for ESG data is booming. Some of the key players/key ESG data Vendors in the Chinese ESG Thematic Investment Ecosystem are technological companies, service providers, research institutions and financial institutions. They provide products and services ranging from raw ESG data, ESG rating, ESG tracking indices and ESG thematic investment funds. Figure below shows the most frequently used ways to incorporate ESG into equity valuation survey by CFA (Dec 2020).
Data source: CFA
Overview of global and domestic ESG rating Landscape
Comprehensive digital tools and real-time, AI-driven insights is helping sustainability managers keep up with the latest ESG disclosure requirements, trends, and stakeholder requests for information. Yet too many management teams struggle with being able to clearly articulate how their efforts in ESG contribute directly to long-term business value creation.
With data and analytics at the heart of business decision-making, the perceived and actual value of sustainability practices and related investments is inevitably linked to the quality and consistency of data. With the dizzying growth of interest in ESG and the speed of change in capital markets and regulatory environments, companies should be focused on assuring the quality of their ESG data. Yet, unlike other business processes, there are very few digital solutions available to companies to collect, analyse, and report comprehensive, reliable sets of data that can be used for different purposes and stakeholders. As reported by Marie-Josée Privyk and Anne Shiraishi.
GC Insights is here to help you get a clearer look at the data venders' market in China. We are here to help managers get more assurance with the designated ESG data and information you need for creating sustainable business values.
Key ESG Data Providers in China
As Chinese government’s commitment to reach Net-Zero target by 2060. It is touch and go for vendors to build ESG database in China. They spin from academic entities to consultancy firms with merits ranging from localized information interpreters to social influencers.
Inclusion of A&H-shares into global portfolio with ESG consideration is trending, however, global investors might struggle to retain ESG data of A&H-shares and through value chains from major ESG data vendors in the international market. Thus, local ESG data providers are becoming more attractive to fill this gap. Some key information about the key ESG data providers in China are shown as bellowed. They are vendors from research institutions, technological companies, services providers, and financial Institutions. We selected some of the leading ESG data providers in each field here. (Note: these common features listed for each category may not included by certain service providers.)
According to Infopro Digital Risk (IP) Limited, Company-provided data, taken at face value, may not reveal the greatest risks that companies face – and may even mask them, diminishing the value investors receive from integrating ESG considerations into their portfolios.
Investors need to identify both company-specific and issue-specific risks by not only rely on company disclosure but to integrate alternative data sources that help fill the informational gaps and apply advanced analytical techniques to develop stronger indicators of risks. And this is when alternative data providers come into the game. As mentioned in our previous article, there are mainly three types of alternative data sources, with data from individuals, companies and sensory data like transportation or geo-locations. There are often three sources of alternative data:
Alvise Munari from MSCI said the biggest challenge is the interconnection among the many challenges institutional investors face in the next five years. These interconnections generate both complexity and a need for additional urgency. Challenges like climate change links to a rapidly shifting social context that in turn drives changes to investor demands and a very dynamic regulatory environment. These trends are both amplified and accelerated by technological innovation, adding significant cost and time pressure. Making investing a more complex ecosystem like its counterparts in the natural world. Climate data is at the center of the revolution. ESG data is evolving, ESG data vendors are more empowered than ever. Nonetheless, as Ping An China suggested in a recent report, ESG ratings and data coverage in the domestic market need to be further evolved to enhance alignment with the Chinese market to support the enrichment of ESG theme investment products. Alternative data and technology can help investors distinguish between companies that are truly ESG compliant and well performing vs. those who are not. The establishment of ESG ratings and data for bonds and bond issuers is essential to accelerate the integration of ESG in fixed-income investments.
As mentioned before, Risks involved with using alternative data are primarily from privacy and regulatory risks. It is important for sustainability managers to look deeper when using these ESG data and information, alternative or not.
GC Insights is here to help businesses get more assurance with their ESG information at hand and insights in how to disclose or analyze with their valuable sustainable information. Talk to us if you too are struggling with turning ESG information into sustainable business values. GC Insights’ ESG Resources could help liberate your ESG data challenges. Contact us for our Latest Analysis on ESG Data Providers and Alternative Data Vendors in China.
(Written by Yitong Yuan)
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