Companies that comply with Environmental, Social and Governance (ESG) parameters are receiving greater support from investors and becoming superior investment opportunities.
However, collating and assessing relevant ESG data across all touchpoints of an organizational value chain can prove a burden on an analyst’s time and resources, for many reasons.
This is where banking and financial services companies benefit from partnering with reputed service providers with domain knowledge and capabilities in data and analytics. Read on to understand how such companies can leverage superlative ESG research for successful long-term investment decisions.
With climate change, social disruptions, and geopolitical conflicts becoming a harsh reality, there is growing consensus among corporates on the need to develop and adopt business practices that score high on Environmental, Social and Governance (ESG) metrics. The consent to be ESG compliant and orchestrate business models accordingly is also driven by an evolving tribe of socially conscious investors who are more than willing not to invest in companies that fail to deliver on ESG parameters.
The PwC 2021 global investor survey1 found that 49 percent of investors were willing to divest from firms that were not taking sufficient action on ESG issues. 79 percent said that how a company managed its ESG risks and opportunities was critical in their investment decision-making.
With ESG becoming a key metric for organizations, EY’s Global Institutional Investor Survey shows that asset managers and banks are all moving towards a more disciplined approach to evaluating companies' non-financial performance. Spending on ESG data has thus received a tremendous fillip. The global market for ESG data surpassed USD 1 Billion in 2021 and is estimated to exceed USD 1.3 Billion in 2022, recording a 28 percent annual growth rate over the past five years.3
In the wake of this new paradigm, financial services companies are racing to integrate ESG data with their conventional reference parameters to make superior investment judgments. Best practices in this field involve collating and assessing ESG data across all touchpoints of the organizational value chain. The layered picture that results from such integration and analysis becomes a significant source of business intelligence for decision-makers.
Not surprisingly, data itself is the primary challenge in this evolving space, especially in terms of data quality and veracity. There are two key reasons4:
An inadequate disclosure of ESG risks from the issuers, and
Conflicts on different categories for what is considered ‘green’ or sustainable
This lack of clarity is problematic for investors who genuinely wish to make a difference. Additionally, an EY survey shows that 50 percent of asset managers and 25 percent of banks believe that a lack of forward-looking data limits the value or impact of ESG reporting.5
ESG fund managers are resorting to various investment strategies to cope with the evolving situation. Take thematic investing, for instance.6
This approach works by identifying a particular trend – renewable energy, sustainable infrastructure, and social equity, to name a few – and investing in firms that operate in that space. Investing in a range of companies in a single area gives a more robust likelihood of picking a winning investment.
A desirable offshoot of this strategy is that investors can branch away from conventional trajectories into more global opportunities; say, to China, which shows tremendous scope in clean energy technologies; to Brazil or South Africa, where social equity is a growing trend; and to other parts of the world where corporate efforts in affordable housing, healthcare, education and so forth are beckoning financial and consumer services.7
The ever-increasing quantum and categories of ESG data, the geographically and periodically changing nature of regulatory hurdles, and the numerous strategies available can make it tricky to pick the right stocks.
Locating firms whose offerings solve the world’s problems can be complex. And finding fund managers who can track them down is an added challenge. Resolving these issues in-house can take time and resources away from the core activities of financial services and market expansion.
In recent times, companies have partnered with expert third parties with capabilities in data and analytics to gain the necessary strategic insights. Service providers who offer a combination of primary and secondary research methods by collecting and analyzing data from multiple sources can supply accurate and timely data for long-term investment decisions. Some agencies also offer solutions that are tailor-made to the specific requirements of their client firms.
The right partnerships are proving cost-effective in helping asset managers and investors identify ESG-compliant investment opportunities, invest in them and augment returns. They also allow clients to leverage well-scoped compliance programs and test metrics before going live.
ESG norms are becoming ever more crucial to investors and their impact on financial research will continue to grow in the years ahead. The latest studies suggest that incorporating ESG factors into investment analysis can improve returns and reduce risks. However, the implementation of ESG practices and the integration of ESG data are complex undertakings.
To succeed, companies need the right partners with domain understanding and capabilities in the latest technologies to support with data, analytics and risk management. The expertise of an entity providing insights into trends and regulatory environment: this is where organizations need to spend for superlative ESG research and better business outcomes.
ESG data spend exceeded $1 billion in 2021 - Best Execution
“If companies do not engage in ESG properly, they will be costed out of business” - EQS Group ; 3 Types of Metrics CEOs Must Use in ESG Reporting (aimultiple.com) ; Why ESG data integration is necessary for financial services | Sustainability Magazine
Why data remains the biggest ESG investing challenge for asset managers | EY - Global
What is the thematic approach to ESG investment? (whatinvestment.co.uk)
ESG-Themed Investments: What Are They And How Are They Managed? (forbes.com)
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