The power of ESG Public Data: from compliance to competitive edge

Lyna Merrar, ESG Specialist, WeeFin

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The power of ESG Public Data: from compliance to competitive edge

Lyna Merrar, ESG Specialist, WeeFin

From data collection to regulatory compliance, major ESG data management challenges are emerging for financial companies struggling to find their way between a data desert and a data jungle.

Global ESG data context

Ever-increasing ESG regulatory pressure to make informed decisions
When it comes to ESG data, financial actors face two major challenges:
• Dealing with a demanding, constantly evolving regulatory landscape that requires extensive reporting and thus ESG data
• Using ESG data to make informed management decisions (which truly go beyond regulatory requirements), enabling the mitigation of environmental/social risks while optimising financial and non-financial benefits

In both cases, it is essential to be able to collect data, analyse, and communicate a wide variety of ESG information accurately and consistently. Faced with these demands, financial institutions encounter a series of complex challenges in managing their ESG data.

There are many significant issues surrounding ESG data
Financial companies have 3 ways of accessing ESG data:
1. Private providers
2. Data collected internally, often by ESG analysis teams
3. Public data sources offering datasets that can be consulted and used by anyone, free of charge

Actors face several challenges navigating among all the data sources:
• Ensuring the quality and reliability of ESG data
• Selecting the right data point based on its use (for example, if I am doing reporting vs. if I am doing stock picking or exclusion, I will not use the same data point)
• Developing consistent calculation methodologies

To achieve this, financial institutions must implement a technological solution to streamline and automate processes, which presents an additional challenge in its implementation and use. Furthermore, subscribing to the offerings of private data providers is costly and weighs heavily on the ESG budgets of players who consequently have difficulty finding resources to ensure the proper use of this data in their investment processes.
 

The role public data sources must play

Public data is the result of work carried out by non-governmental organisations, associations, public institutions or non-profit companies, with a focus on specific research topics. In the ESG data rush, these sources stand out with multiple advantages.

What are the pros and cons of using public data?
In light of the regulatory requirements and data challenges, public data sources are in a strong position.

First, they stand out for their accessibility (free and direct access). They generally provide direct access to their methodologies, sometimes down to the calculation formulas. Moreover, public sources confer a form of sovereignty over their data and methodologies compared to private sources. The European Commission proposed a regulation on ESG rating providers to mitigate the lack of transparency and prevent potential conflicts of interest. In light of these future regulatory developments, public data can uphold a strong position.

While public data offers multiple advantages, challenges remain. Their Achilles heel lies in their coverage levels, often made up only of listed companies, it remains limited (may be restricted to a geographical area) and sometimes non-evolving. At the same time, some datasets are not regularly updated.
 

What are public data sources here for?

To challenge private datasets: the use of public sources can ensure data quality and consistency, bringing an internal layer of analysis.

To exclude issuers: most financial institutions use public data to define and apply their exclusion policies. Urgewald being a perfect example as an NGO which, thanks to its in-depth knowledge of fossil fuels, publishes 3 datasets: Global Coal Exit, Global Oil & Gas Exit List and Metallurgical Coal Exit List, all of which financial institutions use to exclude.

To create scores on sovereigns: many public sources gather data on countries that are used when establishing scoring methodologies.

To gather data for thematic funds: public sources are often very detailed research on specific topics or sectors, which can align with the narrative of a thematic fund.

To engage with companies: public sources can help identify where companies stand on specific issues.

If many use cases are covered by public data sources, the search for coherent, fit-for-purpose public data, as well as its exploitation, can be proved complex.
 

Where can you find this data? How can you use it?

Identifying public data sources: There are numerous public sources and each of them has its specific characteristics (frequency, objectives, indicators, etc.). Players may therefore find it difficult to navigate between the various opportunities and identify the sources to exploit. To help asset owners and managers, WeeFin partnered with the FIR (French SIF) to publish a growing Mapping of Public Sources in which we have analysed +50 public data providers and their datasets, explaining the sources, indicators they use, clarifying the methodology, etc.

Collecting the data: public sources are often easily accessible via a dataset that can be downloaded directly from their websites. Some sources, however, require the creation of an account and/or the filling in of various information. For a few sources, the dataset cannot be downloaded or implemented directly due to their format (contacting the public source could be a way to ask for a usable format).

Processing data: the usability of public data then remains uncertain. Methodological and technical expertise is therefore required to understand datasets and adjust their format in order to integrate them into investment management processes. Furthermore, the public datasets do not include the identification codes of the issuers analysed. In that case, data points need to be matched directly with financial data which can be tricky, and result in the need for data quality controls. Defining a strong data management process, leveraging on technologies is the key to using them effectively.
 
In view of all their advantages, public data sources are increasingly used and integrating the composite ESG data market. If their use is not slowing down, the potential of this alternative solution helping to overcome many data access challenges, is still insufficiently exploited by financial institutions.

In times where no data set is perfect, either in terms of methodology or coverage level, it is highly recommended to cross reference different sources of private and public data.