Investors seek more Environmental, Social and Governance data to monitor and score companies’ sustainability practices
Demand is growing for better ESG data that leads to improved understanding of ESG’s impact on financial performance
For investors seeking data with which to build sustainability criteria into their asset portfolios, the Hong Kong stock exchange’s push for more stringent disclosure of the environmental, social and governance risk has facilitated a boom for the service providers that advise, monitor and certify ESG performance of listed companies.
Recent acquisitions by big research and index providers – such as S&P Dow Jones Indices’ takeover of Trucost in October last year – gives an indication of the attractions in the growing advisory services market.
“The demand for ESG data and indices is growing,” said Alex Matturri, CEO at S&P Dow Jones Indices, at the time of the deal. “The complementary nature of our two businesses allows us to combine Trucost’s industry leading environmental impact data and risk metrics with our global footprint and world-class benchmarking capabilities to develop new ESG solutions.”
For big companies with deep pockets and well-organised management structures, the added disclosure requirements are unlikely to present an insurmountable hurdle: the extra costs are likely to be marginal, while their data-collection and processing capacity is probably already in place. But many mid- and small-cap companies will struggle to pay third-party providers – or be forced to accept low-cost services of doubtful quality.
Technology could be one of the possible solutions to the problem. Fintech companies can help deliver better data that leads to improved understanding of ESG’s impact on financial performance, showing real causality and enhanced scoring of companies’ sustainability practices.
“The most beneficial and cost-saving approach is the use of big data for ESG scoring,” says Entela Benz-Saliasi, adjunct associate professor, Hong Kong University of Science and Technology. “ESG scoring methodology tends to be very poor, with only a few players able to make well-informed calculations of it.”
Scores are derived from questionnaires that companies must complete to receive their ranking. “Big data will make this time consuming and unrealistic questionnaire obsolete,” Benz-Saliasi says. Fintech firms also make ESG-related products more accessible, she adds.
Just nine months after China’s digital payments, banking and fund management giant Ant Financial – which owns Alipay – launched Ant Forest, more than 200 million of its customers had signed up to use the mobile app, which nudges consumers to make greener choices, averting 150,000 tonnes of carbon emissions and leading the company to plant more trees.