Green gold: How big ESG data will become big business

Big data will be key to creating a more robust and reliable ESG framework.

Data, so the tech sector would have us believe, is the new oil. In the world of ESG, where the aim is to divest from fossil fuel production and consumption, this is an unfortunate analogy. Nevertheless, as ESG continues to grow as a sector and as an investment class, data will indeed prove to be very valuable and could prove to be green gold for those who can harness it.

Driven by growing awareness of the need for action on climate change, ESG as an asset class has grown significantly in recent years. Recent research from PwC reveals that asset managers globally expect ESG-related assets under management to grow to $33.9tn by 2026, from $18.4tn in 2021. The research forecasts that ESG assets could constitute an impressive 21.5% of total global AuM in less than five years.

This is great news for the planet and reflects a growing desire on the part of retail and institutional investors, as well as consumers globally, to spend and invest sustainably. With such impressive growth, it’s unsurprising that there have also been growing pains in ESG.

Data’s ESG role

From greenwashing, to greenhushing, to simple cases of businesses struggling to keep up with a rapidly changing regulatory environment, ESG has encountered its share of challenges. This is where data comes in.

As ESG becomes an ever more important asset class, not just for the environment but also for investors, so regulatory scrutiny is increasing. Last week saw the publication of the International Sustainability Standards Board (ISSB) inaugural IFRS Sustainability Disclosure Standards: IFRS S1 and IFRS S2, and the scope of regulation grows by the day as businesses, consumers and international governance organizations seek ways to meet the climate challenge.

One of the key challenges currently faced by both businesses looking to comply with rapidly evolving ESG regulation, and investors looking to direct funds in ways which align with their values and the values of their customers, is sometimes inconsistent ESG data.

Reporting and metrics

The good will that has driven the ESG agenda so far risks being undermined by inconsistent reporting, data standards and metrics. In fact, a recent survey discovered that only 23% of asset owners are happy with the quality and consistency of ESG data. This has led to a dramatic shift over the last 12 months, away from a reliance on unverified, in-house ESG data reporting to the need for independently evaluated and authenticated data collection and analysis.

On the regulatory level too, we see efforts to develop consistent, cross-jurisdictional reporting standards. The EU’s forthcoming Corporate Sustainability Reporting Directive (CSRD) is a step in the right direction here. It is an ambitious Directive that will apply to businesses both within and outside the EU. This in turn will help in the push for international standards of ESG reporting, which is important especially for businesses and investors who operate across multiple jurisdictions.

Aside from regulation however, big data will also be key in the effort to create a more robust and reliable ESG framework.

Increasingly sophisticated AI and data analytics tools … could be the key to unlocking the true potential of ESG.

A key aspect of the CSRD is that the data it produces will be machine readable and this hints at the power that big data has here. Increasingly sophisticated AI and data analytics tools, combined with better gathering of data within organizations, could be the key to unlocking the true potential of ESG. Currently, organizations often treat ESG data as a secondary concern but, as argued here, to make it work, collecting ESG data needs to be seen in the same light and given the same priority, as collecting financial data.

It is likely that, alongside regulatory convergence globally, we will also see all regulatory regimes going the way of the EU and building machine-readable data into their regimes. All of which will ensure ESG data is more transparent and more easily analysable.

When it comes to complying with emerging ESG regulation, and with consumer expectation that businesses take their environmental and social impacts seriously, greater regulatory alignment and better data standards will help.

Third-party auditing

Alongside this, we are seeing a shift toward independent, third-party auditing of ESG data and this too is crucial to investor confidence. More investment managers than ever are outsourcing their ESG needs, as the complexities of data collection become clear, with many understanding that “marking their own homework” in this regard, will only invite further scrutiny.

This approach also diminishes the value of ESG data that might otherwise be highly valuable. Verified and accurate data underpins meaningful comparisons against international standards and allow businesses and investors to drive change programs and monitor change over time. It also allows for meaningful and increasingly granular intra-business comparisons and allows businesses to understand how ESG and financial performance metrics correlate.

A whole range of businesses and products are emerging in the field of ‘regtech’ to help businesses find, compile and track the data they need. As ESG regulation matures, and businesses become more accustomed to compliance, the costs of compiling strong ESG data in time and finance will also decrease.

Growing market share

ESG data will truly become green gold when it comes to growing market share and growing businesses internationally. A survey of 23,950 members of the investment community last year from Schroders found that more than half of respondents (52%) are drawn to funds aligned with sustainability and 69% believed that investing sustainably will be key to long-term returns. Consumers more widely too have become highly conscious of environmental impacts, with 73% wanting to reduce the environmental impacts of the consumer decisions.

The world is changing as more and more people become conscious of the need to protect the environment for future generations. ESG is one of the key drivers here, in terms of encouraging better business and giving investors the tools they need to invest sustainably. Data is crucial to this and those businesses that can drive positive change, and communicate that change effectively with organizational data, will be well placed to capitalise on changing consumer behavior and a changing regulatory landscape. For those that are willing to embrace it, ESG data truly will be green gold.

Andy Pitts-Tucker is head of ESG product at Apex Group. He has has over 24 years’ experience in the financial markets sector and has specific responsibility for driving the Group’s strategic ESG development.