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Delivering 'Decision-Useful' ESG Data

As investors, regulators and consumers focus on corporate ESG practices, companies around the world are under intense pressure to disclose data on a host of ESG issues.

Because much of this information resides outside the normal corporate financial reporting process, assembling and ensuring the quality of ESG data has proven to be a challenge - especially at a time of tight budgets and limited resources.

Fortunately, help is on the way. Companies and investors have access to a growing number of third-party technology solutions designed to assist in the collection and processing of ESG data. Although many of the products available today focus on emissions and carbon reporting, providers are rolling out new tools and platforms targeting the full range of ESG metrics.

Hot Topic

ESG disclosure rules are being hotly debated in both Europe and the United States, but even today, no one knows exactly what the final requirements will look like.

In the United States, regulators traditionally have hewed to a relatively narrow view of materiality that is tied to financial statements and financial metrics as a deciding factor in determining what information must be disclosed. These concepts of materiality are historically tied to an individual investor's perspective on what is material to a single company. But with ESG funds attracting massive inflows, US regulators are likely to shift at least slightly to the more expansive view of materiality that looks at what is material to investors in a much broader way, including in the context of an investor's portfolio across companies.

This broader view of analysis is based in part on the approach followed by regulators in Europe, who have moved much faster to create a standardized reporting regime across companies and industries and are much more willing to require companies to disclose information that could have an impact on broader social and environmental conditions, regardless of materiality to any specific business.

Meanwhile, the surging popularity of ESG and the need for better disclosure has given rise to a growing host of data sources, ranging from third-party ESG research firms to non-governmental organizations and financial industry trade associations. Companies and investors alike complain about the resulting alphabet soup of ESG data providers, standards and formats that are inconsistent, incompatible, and at times entirely contradictory. Different providers use different methodologies, often with less-than-perfect transparency about how scores and ratings are calculated. Users are frustrated by the fact that there is often little to no correlation among ESG scores from different providers.

Data Robustness and Reliability

I recently participated in an ESG discussion with representatives from well-known investors (Nuveen, and Calvert Research), as well as with a senior representative of Delta Airlines and a senior executive from Persefoni, a climate disclosure and carbon management technology firm.

During our discussion, one of the investors mentioned that these shortcomings have prompted their firm to do its own analysis of raw data, rather than relying on third-party ESG ratings. Of course, this internal research process requires investors to identify and secure specific data relevant to their decision-making process. Often, that means submitting data request to issuers - including requests for harder-to-assemble qualitative data on issues like the board's oversight of ESG initiatives, or the quality of corporate policies on hiring and diversity.

This situation forces companies to keep up with fast-changing disclosure rules, while simultaneously accommodating detailed ESG information requests from their shareholders. This effort is proving both expensive and time-consuming, in large part because the process for collecting that data usually has to be created from scratch. The tried-and-true processes companies use to capture and report financial results were not built to include information on carbon emissions, employment practices or virtually any of the myriad metrics encompassed by ESG. As a result, companies are building entirely new processes to reach across business lines, functions, teams and systems to find and capture ESG data.

But identifying and retrieving that data is just the start. Even as they build systems to capture information, companies must ensure that the data is accurate and timely - a task that often entails a deep-dive into the underlying system to ensure data robustness and reliability. Finally, in order for the data to be useful internally or for disclosure to regulators and investors, they must be presented in a usable and consistent format.

Leveraging Technology

This is a massive undertaking for even the biggest corporates. These demands have prompted many companies to look to external partners for help. In my time at Uber and Broadridge, I've relied on firms like Third Economy, an ESG consulting firm, PWC, CBRE and Ecovadis to help make the collection of emissions data more efficient. This is why firms like Persefoni can be useful as they can help companies produce emissions data using their technology. In a typical large company, there are hundreds or even thousands of data inputs that contribute to carbon footprint.

At Broadridge we have tools that help companies collect and assess their ESG ratings across raters and rankers, while we also have created a carbon emissions calculator for clients that want to understand how our products and services contribute to their Scope 3 emissions. Third-party providers are offering software tools that integrate with companies' internal systems through APIs or other data feeds to automate much of the process of collecting and compiling this data. For example, at Uber we relied in part on Ecovadis, which was integrated into our systems for paying utilities bills, which made the production of carbon data more efficient and reliable.

Critically, these tools also help companies present and analyze data, helping them identify emissions sources, potential risks and opportunities for improvement. The software also creates an auditable data trail that makes it easier for companies to assess and ensure the integrity of the data. Although similar solutions for other types of corporate ESG data are still in more nascent stages, they are progressing quickly, with new alternatives coming into the market at a rapid clip.

Investors are also partnering with third parties on ESG data collection. In some ways, asset management firms face a bigger challenge than corporates when it comes to assembling ESG data. While companies are responsible for producing accurate data on their own operations, asset managers need to source and analyze ESG data from scores of individual companies that make up their portfolios. Fortunately, asset managers also have access to a range of innovative tools that can make this process more effective and efficient. For example, some asset management firms are partnering with data science firms and other external vendors to test the broad range of available information and home in on data proven to be 'decision useful'. Calvert's Anthony Eames said that by using this analytical process, his firm found that, out of the thousands of ESG key performance indicators available, fewer than 250 were decision useful in the context of the firm's investment process.

These examples demonstrate how rapidly the industry is innovating in the face of intense pressure to deliver accurate data on ESG. By partnering with third-party technology providers, companies are proving that it's possible to overcome the many significant challenges and resource constraints and supply regulators, investors and all stakeholders with robust, reliable and decision-useful data on ESG.

Keir Gumbs is the Chief Legal Officer at Broadridge Financial Solutions

This article first appeared in Sustainable Investment.

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