An abundance of ESG data is available to investors that want to integrate ESG into their investment strategies, but according to experts large data gaps still exist and some of the most relevant information remains missing.

Speaking at an expert roundtable, entitled ESG integration from “why” to “how”, hosted by BlackRock on 17 November, Aurélie Ratte, Head of Editorial Governance, MSCI ESG Research, said that while there had been a surge in corporate disclosures, continued issues around data availability and consistency had created huge ESG data gaps. “It is a paradox because we always hear there is a lot of ESG data. At the same time there isn’t enough relevant data,” she said.

ESG data is most often categorised as non-accounting information because it captures components important for valuations that are not traditionally reported. The valuation of companies has become more complex, with a growing portion tied up in intangible assets.

Alternative data fills the gaps

Ratte said alternative data, such as specialised data sources, media sources and mandatory disclosures, can help companies get a clearer picture of a company’s performance. According to Ratte, on average, half of the information MSCI ESG Research uses to measure ESG performance comes from company disclosure, while the remaining half relies on alternative data sources.

Victor van Hoorn, executive director at Eurosif, said a lot of the data that companies miss are often highly important. “For example, you barely get any disclosure that is meaningful around how climate risk may impact the strategy or operations of a company, as highlighted by a recent report from the Task Force on Climate-related Financial Disclosures. This information is critical for investors,” he said. According to Van Hoorn, disclosure of more relevant data should improve in 2021 when the EU revamps its regulatory frameworks on reporting on non-financial data by issuing companies.

Panellists also expressed deep concern about greenwashing and the proliferation of data as the ESG market continued to expand. Ewa Jackson, Director, a member of the BlackRock Sustainable Investing team, said this had left investors with many unanswered questions over which data provider to use and whether the data provided was appropriate for a given strategy. “There is a need for common comparable metrics, that are forward-looking, decision useful, robust and actionable,” she said.

Incorporating ESG data into investment decisions

A growing number of companies are also incorporating ESG data in their investment decision-making process. Ursula Marchioni, Managing Director, Head of BlackRock Portfolio Analysis and Solutions (BPAS) in EMEA, said firms had invested large sums of money to enhance their technology ecosystem so that they can embed ESG data at the portfolio level. “The investment is happening and the demand for these solutions is certainly rising,” she said.

Ratte said artificial intelligence would also make it easier for firms to find patterns in ESG data. However, she said it is crucial that signals extracted from this data serve multiple goals, such as identifying ESG risks and opportunities, identifying positive and social impacts, and matching investments with moral values. “Having more data is the easy part. The hard part is what to do with it and knowing how to identify and apply the relevant signals,” she said.