Is your ESG data unlocking long-term value?
Improved environmental, social and governance (ESG) insight and data analytics could be important to delivering long-term value.
Many investors are putting ESG performance at the heart of their decision-making, in turn underlining the value of sustainable business practices, and there are two priorities that could help to realize its full potential.
First, investors should receive better-quality ESG disclosures and data from companies. Progress also should be made by standard-setters and policy-makers around a clearer regulatory landscape governing these disclosures. Despite the importance of ESG performance reporting to investors, there are some concerns about the consistency, transparency and quality of ESG disclosures investors receive, particularly around the materiality of the disclosures.
In fact, this concern is growing: 50% of investors surveyed in the 2021 EY Global Institutional Investor Survey indicated they are concerned about a lack of focus on material issues – an increase from 37% in 2020. Investors are also clear that globally consistent standards are expected to be important to improving the quality and transparency of corporates’ ESG reporting: 89% of investors surveyed said they would like to see reporting of ESG performance measures against a set of globally consistent standards become a mandatory requirement. As examined in a previous EY article, the investor sentiment perhaps reflects the importance of more uniform global standards to transparent measurement and high-quality disclosures around ESG performance. In turn, this can help to underpin good business management, and build and preserve stakeholder trust.
It is important for investors to develop sophisticated in-house capabilities for gathering and managing quality data. At the same time, it is critical for corporates to develop data analytics capability to help produce trusted ESG reporting insight that tells their sustainability story and differentiates them from the competition.
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Second, building data analytics capabilities could be key to helping corporates produce trusted ESG performance reporting, allowing investors to then incorporate that insight into their investment decision-making process.
To build a data edge and improve quality, investors will likely require a data management approach where they can process and channel relevant and high-quality data with flexibility, cost efficiency and effectiveness – with security and resilience – into the investment process. However, the research shows that fewer than half (46%) of investors surveyed have a fully deployed and sophisticated approach to data management, with a central ESG data repository where data can be accessed simultaneously and in real time by many different applications.
Technology and data innovation can be important to both the companies issuing ESG performance data and the investors consuming that insight:
- As demand for deeper and more credible ESG performance data and insight grows, corporates should improve the way they collect, aggregate and govern their own data.
- For investors, innovation in areas ranging from cloud computing to Artificial Intelligence (AI) can help integrate ESG data into investment analysis. For example, AI can allow investors to uncover material data that may exist outside a company’s formal ESG disclosures.
There are a number of important actions for both the corporates issuing ESG reporting and the investors that utilize that information:
1
Corporates should better understand the climate risks to their business and how to best report these risks; make strategic use of the sustainability function to help inject rigor into the process to assess and communicate progress on the most material ESG issues for the company; engage with, and embed, the finance function to create robust control frameworks and measure financial linkages to ESG; and deepen engagement with investors, including understanding the new ESG disclosure requirements and how to differentiate a company from its competitors.
2
Investors should update their investment policies and frameworks for investments to incorporate ESG strategies while building an awareness of ESG risks and opportunities; update approaches to climate risk so they can interpret and understand climate scenarios and consequences of climate risks to target companies and sectors over the short, medium and long term; and put in place a bold and forward-looking data analytics approach capability.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
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