Avida International together with Arabesque recently had a roundtable on the pertinent topic of ESG and data reporting. The acceleration of ESG investing in the UK is a somewhat recent phenomenon, because of this there is still a lack of reliable data being reported. The question of how to implement effective data reporting was the main topic of discussion.
Lack of reliable data
One of the main problems surrounding data reporting in the ESG space is the lack of transparency in the area. Simply put, if companies do not fully and transparently disclose their ESG data, then how can you trust the reporting of it? This lack of transparency necessitates a proxy data system which can only be used to estimate trends and since it does not rely on concrete past performance, cannot be relied on by investors. Indeed, most climate alignment models are based on estimates of proxy data, these models are not only subject to assumptions but also create misleading measures of progress, since the models used by most people in the industry are based on averages. These averages assume that companies which do not disclose data are comparable with companies which do, however this is not the case. Indeed, the evidence suggests companies which do not disclose their data are those which pay the least attention to incorporating Sustainability into their investments.
Problems with reporting standards
Having transparent ESG data will also help investors not to rely on different reporting standards. The fact that each provider has their own definition means that there is an inconsistency of reporting which makes it difficult to compare companies and portfolios. For example, some companies might score in the top quartile of one ESG data provider but are in the bottom quartile of another. Providers have different criteria and methodologies to assess the ESG rating of a company. A lack of standardised data means a lack of a standardised reporting.
Another important point surrounding transparency and ESG reporting is that a lack of transparency allows greenwashing, which is prevalent across the investment space. Many companies and investment managers which claim to be aligning themselves with net-zero policies are not, and merely do not disclose the full picture. Trust is something which is earned, having transparency in the underlying ESG data is paramount as it allows verification.
Hope for the future
However, despite the problems described concerning transparency, the majority of large, listed companies are providing good disclosure on their scope 1 and 2 emissions, with scope 3 in the last year becoming more available. Furthermore, the Task Force on Climate-related Financial Disclosures (TCFD) will also help to create more transparency as it will force asset managers in its scope to disclose information around their sustainability impact and risk.
The 'Spotify' of ESG data?
Arabesque have designed a free ESG cloud platform based on the ESG data of around 8,000 public companies (plus a growing number of private companies) which provides raw unfiltered data and ratings. The platform also enables companies to disclose data directly on the platform and allows engagement between businesses and investors. This amount of data means that investors can concretely see the direction of ESG investing across their entire portfolio in a consistent manner and this in turn creates standardised reporting which can then be used for investment decision making and the setting of strategic sustainability targets.
If you would like to know more or be put in touch with someone from Arabesque, then please get in touch below.