ESG Data: Dazed and Confused

An anatomy of data from one ESG provider

November 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Case study of one ESG data set from a well-known provider
  • Highly ranked ESG stocks do not have better fundamentals
  • Stocks with the worst rating outperformed over the past 12 months

INTRODUCTION

The ESG ecosystem has three groups of players – the data providers, the asset managers and index providers (data consumers), and the asset allocators. Unfortunately, it is a rigged game with only one clear winner – the data providers that sell ESG ratings. Current demand for anything ESG allows asset managers and index providers to charge more for ESG than for plain-vanilla products, but there is the additional cost of buying data, hiring quant analysts to dissect and organize the data, and spending money on marketing. There are second-order benefits to asset managers like reducing the emphasis on short term performance (“Don’t mind how badly value is doing, rather look here at how great our ESG positioning is!”). The asset allocators, and ultimately their clients, are most likely the losers as they are financing this “feel-good” ecosystem, with little evidence supporting the idea that ESG investing generates consistent outperformance.

The market for ESG data is expected to grow by 20% and reach $1 billion in 2021 as per a recent research note by Opimas, a management consultancy. The growth in data spending is mirrored by a significant increase in the assets under management in global ESG ETFs, which have increased by $38 billion to more than $100 billion in the first eight months of 2020, according to data from ETFGI, a data provider.

It is precisely because of the strong momentum of the ESG industry that investors need to be cautious in evaluating ESG data, which has become increasingly complex given the abundance of options. As of today, there are more than 600 ESG rating frameworks as reported by the think tank SustainAbility, which makes it almost impossible for investors to evaluate all of them. Furthermore, some ESG methodologies result in strong sector and factor biases, which can lead investors to unknowingly double up on the same risk exposure.

Having said this, not all data providers have the same methodology, and the complexity of ranking companies provides an opportunity for differentiation. In this short research note, we will e