Sustainable finance starts with data

Businesses today face significant environmental and social challenges that pose risks to their potential to sustain growth. At the same time, the regulatory landscape is evolving, new technologies are emerging faster than ever before, and customer behaviour is shifting.

Addressing these shifts in global markets presents a challenge for financial advisors and investors who are actively seeking places to invest their money that support their sustainable values. The difficulty for many investors, however, is a lack of disclosure by many firms.

Sustainable investment decisions require data, and where disclosure and data exist, there tends to be insight that leads to record investment. Nowhere is this more evident than in the first nine months of 2019, where investors allocated a record $89 billion into global green and sustainability-linked loans. Given that 90% of the world's available data was created in the last two years, these sustainable considerations are likely to be at the heart of mainstream investing in the near future.

A recent report from Refinitiv – “A Deep Dive Into Environmental Metrics” – found that 63% of companies within Refinitiv’s Environmental Social Governance (ESG) database, which covers approximately 70% of the world’s market cap, have a policy to reduce emissions. This is up 56% from five years previously, showing a solid trend of companies committing to take their impact on the environment more seriously. However, only 35% of companies have specific reduction targets around their emissions, meaning many are setting up policies without backing up their intentions.

How do businesses emerge as leaders in the current market transformation?

Today, corporates struggle to measure their impact on the UN Sustainable Development Goals (SDGs) as the data is not available or defined. Many of these firms are not yet providing useful information to quantify, measure and compare their impact.

Both public and private companies require disclosure standards on tracking and reporting such information. The lack of actionable data results in capital markets that are unable to integrate sustainability considerations and, as a result, allocate capital to inefficient and often environmentally damaging effect.

Still, it is incumbent on these firms to work diligently to find ways to navigate this new environment if they are to survive and strive. As Mark Carney, the Governor of the Bank of England, said: “Companies that don’t adapt will go bankrupt without question.”

The United Nations estimates that $5-$7 trillion of investments are needed to achieve the SDGs. But only when measurable and comparable fundamental data is available across companies operating in different industries and regions, can investable and diversified SDG-related financial products be developed to meet the rising demand in the market and channel significant capital towards the SDGs.

Last year, we highlighted the importance of ESG factors as we partnered with the World Economic Forum and others to develop our Sustainable Leadership Monitor (SLM), a tool which shows leaders their business impact based on over 450 data points of sustainability, governance, citizenship and long-term financial performance.

The SLM empowers users to visualize trends in specific ESG criteria against their peers – covering over 7,000 globally listed companies – and inform short-term and long-term decisions.

Is it time for ESG to become more of a science and less of an art?

At Refinitiv we believe that ESG data should be seen and treated as fundamental data rather than alternative data. This classification puts ESG data on a par with all other investment grade data that informs institutional decisions regarding the allocation of capital.

The Future of Sustainable Data Alliance (The Alliance) was formed with the objective of mobilizing capital for a sustainable economy, through enhanced decision-ready sustainable data. The Alliance looks to solve the question: What data do investors need to meet the requirements of both regulators and customers for sustainable investments and products in pursuit of the 2030 Agenda?

The Alliance was inspired by Refinitiv’s partnership with the UN Task Force on Digital Financing of the SDGs and the Future of Finance report, which shows that the availability of reliable ESG data and SDG impact data is crucial for accelerating more SDG investments at scale.

The report – a survey of nearly 800 asset allocators across the US and EU – noted: "60% said that the socially responsible investing approach was an important consideration in their selection of asset managers, up from 53% just a year ago. A common misperception is that the ESG trend is driven by millennials. While it’s true that interest in ESG is highest among millennials at 77%, majorities of both Generation X (64%) and Baby Boomers (61%) were also interested in socially responsible investing.”

With greater support for disclosure standards and innovation, investors will have the guidance and tools needed to drive sustainable investment decisions and fulfil their fiduciary duties through better quality and more widely available data on sustainability and performance; superior data analytics through the advent of artificial intelligence and machine learning; and more informed judgements of strategic resilience.

The power of data

We believe that for any sustainable actions to be effective, all ESG operations must first be tracked and then reported. The reality, which needs to be changed, is that ESG reporting is optional rather than mandated. In its current state, some companies are allowed to not report their impacts. This is an urgent problem that must be resolved in order for sustainable action to be truly effective.

The importance of disclosure is demonstrated in the latest EY survey on nonfinancial reporting, revealing that 97% of the investors who responded to the survey say that they conduct an evaluation of target companies’ non-financial disclosures, which includes ESG data. Only 3% say they conduct little or no review of such data.

At Refinitiv, the basic understanding that ESG data is fundamental data represents the first step in realizing the power of data for investment decisions. We believe that there are also too many unstructured and inconsistent ESG standards being developed by various groups related to valuation-based investing.

At Refinitiv, with our transparent standardized ESG data points (400+) and analytics (70+) – for companies representing nearly 70% of global market cap – we strive to be the industry standard database that reflects official company disclosure on ESG metrics. We believe that maintaining standards of company disclosure and reporting on ESG measures is critical for driving accurate investor information and regulatory guidance, while also driving positive outcomes at both a financial and social level.

We first gather data from structured datasets, like corporate filings, and add it to data collected from other sources, such as web scraping, news reports, reports by NGOs. Data is then cleaned and distilled to illuminate corporate performance on hundreds of individual measures. Scores are generated measuring performance on sub-categories of the ESG universe, as well as an “ESG controversy” score, a measure of media coverage of controversies in which the company is concerned, which may have an impact on ESG-focused investors. These scores are weighted and combined into an overall ESG score.

Without a comprehensive view of one’s ESG operations, bringing about culturally systematic change becomes ever more challenging. We cannot effectively change that which we do not openly track and disclose. And it is not only about disclosed data, it’s about other data sources as well.

Ultimately, benchmarking to an agreed standard is the next step that will enable greater transparency for firms to compare like-for-like. We encourage you to join us to help bring about measurable change through the power of data, and let’s make ESG more science than art.