Environmental, social and governance (ESG) data suppliers could be pulling in a collective US$1 billion in revenue by next year, according to a new paper by European consultancy firm, Opimas.
The Opimas study found the rapidly expanding appetite for ESG investing – especially in Europe – fed the new breed of data suppliers some US$617 million in revenue last year.
“With an expected annual growth rate of 20 per cent for ESG data and 35 per cent for ESG indices, the market could approach US$1 billion by 2021,” the report says.
The ESG data-rush has also come with the inevitable industry consolidation in the last couple of years, Opimas says, as larger players snap up specialist providers.
“Today, different categories of ESG data providers coexist in the market: generalist data vendors (e.g., Bloomberg or Refinitiv), ESG-focused data vendors (e.g., Sustainalytics, Carbone 4, CDP), credit rating agencies (e.g., Moody’s), exchanges (such as LSE, JSE, etc.), and asset managers (e.g., Arabesque, Robeco SAM, etc.),” the report says.
“The range of services differs among these vendors, but they tend to all offer a range of products allowing access to different levels of data granularity, covering all use cases at financial institutions and corporates.”
But the study also warns that investors should take care in turning ESG data, particularly quantitative-based ratings, into investment decisions.
“ESG ratings use should be limited to assess the evolution of a company over time and its trajectory towards sustainability rather than for comparing firms, even within the same industry,” the report says.
In a statement, Axel Pierron, Opimas managing director, said the wide variety of ESG data quality and different reserach methodologies presented a dilemma for investors.
“The issue ahead is that the industry is likely to see a massive reallocation of portfolios toward companies that have better ESG ratings solely based on incomparable data. Investors will end up with stocks that are overpriced due to — at best — incomplete or outdated data,” Pierron said.
“But the bigger danger looming is the backlash after a highly ESG-rated company is caught off guard by an unforeseen turn of events that reveals its ESG data to be flawed, incomplete or not fully transparent which, in turn, could compel people to start questioning the value of integrating ESG criteria into their investment decisions.”
And another study released last week also underscored the growing influence of ESG among large investors.
The fifth annual survey of institutional investors by New York-headquartered shareholder services firm, Morrow Sodali, found “2019 marked a turning point in incorporating ESG factors into mainstream investing”.
“Respondents unanimously agreed that ESG risks and opportunities played a greater role for them in 2020 when investing and engaging with companies,” the Morrow Sodali report says. “Unsurprisingly climate change was at the top of the ESG agenda.”
Institutional investors are now more likely to incorporate ESG factors into proxy voting decisions, the study says, and even back activist proposals “if the company has weak governance practices”.
“Many investors express a need for more explicit non-financial information, which they see as an important indicator of underlying corporate culture, integrity and sustainability,” the report says. “With regards to climate change factors, it is of primary importance to investors that companies clearly show what is the connection to their financial risks and opportunities.”
Aside from climate change, respondents cited “human capital management” as a major corporate engagement theme for 2020.
The survey says sustainability is emerging as a key factor in fixed income investing where “ESG rating agencies having established themselves as an essential factor in analysing risks and opportunities, in addition to the credit rating agencies”. Over 40 institutional investors representing about US$26 trillion of assets under management contributed to the Morrow Sodali study.
– David Chaplin, Investment News NZ