ESG data: the four motivations that drive use
Data is essential to the environmental, social and governance (ESG) revolution. Access to granular ESG data can help build transparency for market participants. Unfortunately, 63% of US and European asset managers say a lack of quantitative data hinders their ESG implementation.
It is equally important to be clear about the potential application of this data.
- Investors and banks can use ESG data to assess risk, spot opportunities and push companies for change.
- Companies can publish their own ESG data, quantify progress on their ESG objectives and use the data to inform their decisions.
- Policy Makers can use ESG data to inform regulatory frameworks and measure the effectiveness of policies.
This graph of ICEthe second in a three-part series on the ESG Toolkit, explores four main motivations of ESG data users.
1. The Right Thing
The objective: Have a positive social or environmental impact.
For investors, this can mean filtering out companies that conflict with their values and selecting companies that match their ESG goals.
Another example might be to compare the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify an area’s potential socio-economic needs, using metrics such as poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.
|State||Bond issuer||Social Impact Score
(Higher = greater potential impact)
Issuer #1 obligation should have an impact on the community that is almost twice as high/positive as issuer’s obligation #3.
For companies, doing the right thing can include assessing their progress on ESG objectives and benchmarking themselves against their peers. For example, the representation of gender and race is an area of growing interest.
The objective: Manage ESG risks, such as climate and reputational risks.
For investors, this may involve back-testing or analyzing specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The routes presented are virtually identical in many respects, except for their faunal score.
|Transmitter #1||Transmitter #2|
|Current coupon rate||5.0%||5.0%|
|Due date||August 01, 2048||August 01, 2048|
|Price to date (call date)||August 01, 2027||August 01, 2027|
|Wildfire Score (higher = more risk)||3.6||2.7|
Manager ESG risk can also involve analyzing a company’s policies and governance to detect weaknesses. This is important because an ESG controversy can have lasting effects on a company’s valuation.
In a studycompanies with ESG controversies fell more than 10% in value against the S&P 500. They had not fully recovered a year after the incident.
The objective: Targeting outperformance through ESG analysis.
Selecting companies with strong ESG data can align with long-term growth trends and can help drive performance. For high-emission industries, research indicates that low-emission European companies trade at much higher valuations. The chart below shows the price-to-book ratio of companies against the Stoxx 600* sector median.
|Emission intensity above the median (bad)||1.9||1.1||2.0|
|Emission intensity below median (good)||2.7||1.9||2.1|
*The Stoxx 600 Index represents large, mid and small capitalization companies from 17 countries in the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and United Kingdom.
Low-emission energy companies are trading at a valuation close to twice as high than high-emitting energy companies.
The goal: Understand and comply with relevant ESG regulations.
The International Sustainability Standards Board has announced a proposed global report aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Additionally, an increasing number of jurisdictions will require TCFD-compliant organizational reporting.
- European Union
- hong kong
- New Zealand
In addition, a European Union regulation known as the Sustainable Finance Disclosure Regulation (SFDR) entered into force in 2021. It aims for greater transparency in the information provided by companies marketing investment products. Even businesses located outside the EU could be affected if they serve EU customers. In total, the market capitalization of these non-European companies exposed to the SFDR amounts to $3.2 trillion.
Matching ESG data with motivation
There will be an increasing demand for transparent data as ESG investing prospers. To stay competitive, investors, policymakers and companies must have access to ESG data that meets their unique objectives.
In Part 3 of the ESG Toolkit series sponsored by ICEwe will look at the main types of sustainability indices.