ESG data: A comprehensive guide for data buyers and sellers

Three little letters can have a big impact.

The rise of ESG investing — incorporating environmental, social and governance-related factors into the investment decision-making process — has been one of the most significant trends in finance in recent years.

It has fuelled the growth of a new branch of alternative data, with providers targeting clients including hedge funds and other alternative asset managers, plus traditional investors, consultancy firms and corporations.

It can be a jargon-filled, highly subjective and frankly confusing area — ESG means different things to different people and there is disagreement over how to measure and implement it.

It can be hard to know where to begin, but Neudata can help. With a dedicated ESG research team, in-depth use cases and a platform hosting research reports on products from multiple vendors, we can help users navigate the world of ESG and find the right data for their purposes.

Read on to learn about the different types of ESG data, how it is collected and used, challenges to consider and the shape of the market.

Key takeaways include:

• What is ESG data?
• How is it collected?
• How is it used?
• What problems exist with ESG data?
• What is the regulatory situation?
• How many vendors provide ESG data?
• What is Neudata and how can we help buyers and sellers with their ESG data needs?

What is ESG data?

Put simply, ESG data is information about a company that can be used to determine its performance in a range of environmental, social and governance areas.

For instance, Neudata lists a dataset that can be used to identify the industry leaders in environmental innovation — potentially offering insights into which companies are best positioned to deal with the business impacts of climate transition risk.

There are two types of ESG data: traditional and alternative.

Traditional ESG data is typically made up of voluntary and involuntary disclosure information, giving insights over a number of years into company performance.

This data is often free to access with a relatively long history, but has notable shortcomings we will explore below.

Alternative ESG data can be defined as sustainability information collected outside of issuer-reported information.

Alternative data can be more timely and can help reduce the bias in traditional ESG data sources — but also has limitations.

How is it collected?

Traditional ESG data often comes from public filings, sustainability surveys and reports, but can also be acquired through direct engagement or even statistical models.

Alternative ESG data can come from publicly available data like government and regulatory databases, NGO websites and news articles.

Importantly, it usually comes from third-party datasets, meaning it is sourced from outside of issuer-disclosed information — limiting the risk of bias.

Other sources include scientific observational data, most applicable to the “E” in ESG — an example is satellite data used to track environmental performance — and stakeholder feedback data, which offers insights into the various relationships held by firms.

Pros and cons

In an unregulated reporting environment, traditional ESG data can often be subject to disclosure bias. Companies tend to report positive ESG information and hold back on sharing negative performance metrics. Traditional ESG data can also have a large-cap bias risk; bigger firms with greater resources can be prone to ‘sugar-coating’ their ESG performance.

Aside from bias, the main drawback with traditional ESG data relates to timeliness — companies tend to disclose ESG data annually, which can lead to information being outdated. In this respect, traditional ESG data is more backward-looking.

These shortcomings have helped drive the rise of alternative ESG data. Web-scraped ESG data from third-party sources can not only reduce disclosure bias but can deliver insights much more regularly, sometimes at an intra-day frequency.

Alternative data can fill disclosure gaps in under-reported areas like social factors, where relatively few companies report, and can help quantify ESG intangibles, particularly for metrics relating to employee well-being and leadership quality.

But reliability of datasets varies and, as we have noted, the “newness” of ESG means historical data can be limited.

How is it used?

So you have your dataset of choice. What next? ESG data is mostly sold in the form of ratings and scores, which investors feed into their investment decisions.

To take the example of biodiversity loss (a key area within the environmental part of ESG), producers of soft commodities can often be responsible through deforestation.

One provider on Neudata’s platform provides supply chain data which helps investors understand which organisations are most responsible for global deforestation. It aggregates data from geospatial images, shipping records and information on company ownership structures.

The resulting information may incentivise firms not to invest in the worst offenders, or even in a positive sense to invest in those firms which do not have a negative impact.

What are the problems?

We have noted the problem of bias due to widespread self-reporting in ESG data. But there is another, even more important problem relating to its application — the lack of commonly-held standards and rules in ESG investing.

There are more than 600 ratings and scores systems out there, all with their own rules.

ESG is often very subjective — for the simple reason that defining good and ethical business practices will never be objective. Neudata believes that consensus on the definition of ESG will never be reached.

There will always be debate due to contradictions which make an ESG judgement on ‘good or bad’ hard to achieve.

For instance, increasing diesel taxes in France is a step in the right direction to curb the damaging impacts of climate change, but it has harmful consequences for those that are economically worse off.

But this creates an opportunity for data providers and investment managers to differentiate themselves through their differing definitions of ESG, as long as they are able to adhere to the regulatory frameworks in their specific jurisdictions.

If they can find one that meets the needs of clients, is in line with company objectives and suits a particular investing style, all parties will be satisfied.

What is the regulatory situation?

In a word, fluid.

ESG has been a hot-button issue for politicians and regulators across the world, driving the increase in prominence over recent years.

To address the lack of commonly-held standards, many regulatory bodies have made attempts to standardise ESG reporting and frameworks in recent years. But progress has been limited.

It is important to remain aware of developments, but we also believe providers of ESG consensus scores are a good option for investors that are in the early phases of ESG integration.  These scores amalgamate sustainability data from a range of different sources to generate a composite view of ESG performance.

Regulatory developments in recent years have included a 2019 move by the UK to force pension trustees who ignore the long-term financial risks or opportunities arising from ESG factors to justify the decision in investment terms.

The country’s pensions regulator recently announced it would be checking in with firms on progress this year.

The European Union also introduced its Sustainable Finance Disclosure Regulation (SFDR) in 2022.

Neudata’s Sentry service is here to help, helping buyers conduct up-front due diligence on vendors and stay current on industry best practices.

How many ESG vendors are there?

Neudata has identified over 400 ESG-relevant datasets that can help investors comply with government regulations, fill in disclosure gaps or build their own ESG evaluation models.

It is a busy field, which shows just how much the sector has grown over the years.

Neudata has two key tools to help users navigate ESG and find the right dataset for their use case. First, our dedicated ESG research team helps users understand this complex area and proactively discovers datasets aligned with ESG themes.

Second, our unique ESG data scouting and discovery platform is underpinned by a proprietary taxonomy that classifies datasets across different ESG themes and the 17 United Nations Sustainable Development Goals. Many of these datasets are not traditionally thought of as ‘ESG data’ and can therefore provide an additional source of intelligence for data users in this space.

For firms that are primarily interested in discovering ESG data, we offer a product called Neudata Scout ESG, which helps global organisations search, source, manage and compare new sources of alternative data aligned to environmental, social and governance factors.

What is Neudata?

Neudata is an alternative data-focused research platform that specialises in the objective and neutral assessment of data vendors and datasets. We connect institutional investors, corporations and leading global organisations to the most relevant alternative data sources that are used in their internal data ingestion processes.

Don’t forget — our platform is the global authoritative source for unbiased, independent alternative data intelligence.

We don’t buy or sell data, or require data providers to pay us a revenue-share or commission in exchange for recommending their products to data buyers. That means you get unbiased intelligence that’s tailored to your specific research goals and strategies.

Since 2016, we have helped our clients understand the landscape of available datasets, increasing the efficiency of their data spending budgets. Neudata’s data buyer clients represent 60-70% of industry-wide spending on alternative data.

If you have ESG data and want advice on monetising it, or if you're looking to buy this type of data, please reach out to info@neudata.co to learn more about how Neudata can help.

Photo by Joel Naren on Unsplash