Wikirate Learning Paper
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In a 2023 report by BNP Paribas, it was found that 71% of investors consider ESG data to be a significant obstacle to adopting ESG goals in their investment decision-making. The adoption of ESG goals into investment strategies is critical to achieving a just transition. However, the current ESG data and mainstream providers are not meeting this challenge. Wikirate believes a new approach is needed to ensure companies are held accountable for their actions, and investors have the necessary tools to do so.
This is why Wikirate is working to identify these needs and ensure investors have access to diverse and relevant data about corporate impacts from a range of sources. We aim to make this data as accessible, robust and transparent as possible and connect investors to those behind the data through our new project Open ESG Data in the Finance Sector. This paper draws on the findings of interviews and discussions with ESG investors and data users about how they use ESG data, the challenges and the contribution Wikirate could make to the space.
The average isn’t good enough
Currently, Investors are faced with two big problems when sourcing and using ESG data. Firstly, data is scattered and must be collected from a variety of sources, e.g. benchmarking/ratings organizations, commercial data providers, Civil Society Organisations (CSOs), company self-reported data, and government reports. This obviously makes data collection time-consuming and unwieldy. The second, and more serious problem, is that data formats and structures differ vastly from one another, making quick and easy comparison between companies impossible.
A popular solution investors employ to these problems is to create what our respondents call “the average”. Two-thirds use multiple sources in an effort to corroborate the accuracy of the data they gather.
A more time-consuming, and therefore less popular method of checking data is to dig into the raw data. Just under half of respondents employ this method.
Investors don’t trust the data
Through discussions with investors and our own research, we have found a number of issues that contribute to the perceived poor quality of ESG data:
- Lack of Transparency — The methodologies and even the raw data behind benchmarks and ratings are often not available or difficult to understand.
- Lack of Trust — With hidden or difficult to understand methodologies comes a lack of trust and comparability. Often benchmarks and datasets have different results for the same or similar metrics, which leads to different overall ratings. Studies have shown that 56% of ratings of the largest 6 ESG data providers are different simply due to the indicators used to calculate them, coupled with a lack of clear methodologies and it is almost impossible to feel confident you are getting a clear picture of company performance.
- Irrelevant data and greenwashing — In an attempt to give the impression a company is performing better than they are, they release data that has no real bearing on its operations or is of any use to investors.
- Lack of non-self-reported data — The overall feeling of companies marking their own homework is compounded by investors not having access to non-self-reported data( E.g. reports from on-the-ground organizations, trade unions, environmental and human rights watchdogs, etc.).
- Scores ≠ reality — Investors are frustrated when companies are shown to have a strong rating on e.g. human rights, and they know through other research there are many allegations against them. This is likely a combination of the above factors.
- Cost — Investors spend on average $1.4 million on ESG data and analysis every year with sales of private market ESG data predicted to reach $120 million by 2025. Investors feel the cost of acquiring and processing this data is far above the quality they are receiving.
- Political Pressure — Mainstream providers are facing significant political pressure to themselves not appear like advocates for a cause and have started to remove certain key metrics, especially data related to human rights.
The missing S
Investors note a lack of diverse topics as a particular challenge in ESG data in what some are calling a “data deficit” that applies particularly to social metrics. This deficit from the big providers is also down to a perceived duplication of efforts which in itself may be leading to bad quality data as companies are contacted by multiple providers to verify the same information leading to fatigue.
With investors calling for more depth in certain areas, it is even more important to highlight the important work of CSOs as a crucial perspective on corporate impacts.
On the Environmental, investors want to see more real-world impacts better captured in metrics focused on company effects on biodiversity. On the Social and Governance metrics, significantly more variation and diligence are required that not only show what a company has done but is also forward-looking to show what will happen.
This backward-looking criticism of ESG data also applies to environmental topics as companies not only want to see the environmental impacts but also how they plan to address them, such as how they plan to decarbonize.
Investors want more open data
As a concept, open data (data that anyone can freely access, use and share) is not mainstream for investors even though many that we have spoken to are actively using it in some form. Investors told us they have high level of interest in exploring open ESG data further especially when it is used as a means to mitigate many of the challenges associated with ESG data.
Enhancing quality through open data
Our goal at Wikirate is to ensure that all stakeholders, from CSOs to investors, are able to access and use open, reliable ESG data in their decision-making. We’ve listened to the need for more diverse forward-looking data that isn’t just self-reported, but also delves into the supply chain and gives our users the full picture.
We’re working with our partners to open up and drive the impact of this CSO-collected data. We will present it on our new dashboard launching later this year. This dashboard will be the gateway to over 5 million and counting open ESG data points carefully curated by expert groups.
We will also be hosting a series of events exploring the use of ESG data for investors and some of the new datasets to our platform so stay tuned to our new dedicated newsletter!
