Buy-side firms are increasingly turning to a wider array of ESG data providers to compensate for inadequate corporate disclosures regarding sustainability.
This broader approach to data sourcing is essential for firms striving to meet regulatory obligations. However, it introduces the challenge of managing inconsistencies in the data and the difficulties in comparing information derived from various vendors, each employing distinct methodologies to assess sustainability impact.
Research conducted by the cloud-based data management provider Alveo revealed that 71% of executives at buy-side firms across the globe utilize over five data sources, with the average number standing at 9.3. A significant majority, 74%, depend on external ESG rating services for much of their data, while more than half (57%) seek third-party expert opinions on factual matters, such as carbon emissions. Notably, corporate disclosures remain the least utilized source of data. While these ratings services help bridge the information gap, they also exacerbate data management challenges.
The importance of ESG data and corporate sustainability disclosures has surged for investment firms and asset managers, especially following the implementation of various reporting frameworks. A key regulation in this landscape is the EU’s Sustainable Finance Disclosure Regulation (SFDR), which became effective in March 2021. This regulation mandates asset managers to provide transparency regarding the sustainability credentials of any investment products they promote as sustainable, aiming to combat ‘greenwashing’ and to enhance the credibility of the burgeoning sustainable investment sector.
Level 2 measures of the SFDR are expected to take effect in January 2023, which will necessitate increased disclosure from companies concerning their principal adverse impact statements. With other regulatory frameworks emerging in the US, UK, and beyond, concerns linger regarding the potential for inconsistencies in global regulatory requirements.
Mark Hepsworth, CEO of Alveo, noted, “Asset management firms are seeking to significantly enhance their ESG data management capabilities to deliver consistent, aggregated ESG content to various stakeholders. While firms are eager to leverage cutting-edge technologies for ESG data analysis, challenges related to data quality can hinder these efforts.” This apprehension over data inconsistency has sparked a trend of consolidation among different ESG ratings agencies, market data vendors, and exchanges, indicating a shift towards more standardized data management practices in the industry.