FRC explores the new ESG data landscape
The landscape for Environmental, Social, and Governance (ESG) data is rapidly evolving, and understanding how it is currently used, and how that is likely to change in the near future, is crucial. A recent report – ESG data distribution and consumption – by the Financial Reporting Council (FRC) Lab delves into how investors collect and utilise ESG data, based on 90 interviews with investors, companies, data providers, and more, alongside a supplementary survey of 30 investors.
The report examines three key elements of ESG data usage: motivation, method, and meaning. Under motivation, the key drivers for investors collecting ESG data are to conduct analysis of companies and monitor their portfolios, regulatory compliance, and to satisfy the demands of clients with interest in ESG.
Regarding method, almost all investors rely heavily on third-party data providers for their ESG data, combining it with companies’ narrative reporting. This is more time-efficient than sourcing the data individually. They use the underlying data for analysis while monitoring ratings for changes. Challenges here include data timeliness, as ESG reports are rarely published in conjunction with the annual report, meaning that data can be out of date, the lack of clarity on the methodology behind ratings, and the cost of using data providers.
In terms of meaning, investors typically use ESG data qualitatively, overlaying it during company assessment, rather than quantitative analysis. They tend to focus on specific ESG issues, and monitoring companies’ ESG performance over time. Challenges for accessing meaning from ESG data include that the quality of data can be low due to the manual nature of processing. The sheer volume of data also risks obscuring ESG issues. Jurisdictional differences in the availability and quality of data, and data gaps for some ESG issues also pose challenges.
So how can companies better support investors in their use of ESG data? The report has several recommendations, but crucially, preparing for further digitalisation with the use of digital taxonomies, and an aiming for comparability would make a significant difference. Digital, standardised data, if implemented effectively, could help overcome many of the challenges investors face around data quality, timeliness, comparability, and cost of access.
Read the report here. The FRC have also published a podcast discussing the report’s findings, which can be accessed in the same location.
