The Road to Solid ESG Investment Begins with Regulatory Web Data

Is it a passing craze, or will the ESG trend stick with investors? Gartner’s research shows that 85% of investors apply ESG criteria to their investment strategies.

Investing companies or companies looking for investors can’t ignore ESG data anymore. Nonetheless, there’s quite a bit of confusion around it, and most investors aren’t sure what exactly they are looking for – or should be looking for. They simply know it’s a step towards a more secure and profitable investment.

Consulting groups and financial advisors are tasked with digging up the relevant ESG big data that helps them set ESG compliance scores. Clients depend on them for effective regulatory compliance risk management and to make informed decisions.

What is ESG Data? Definition of ESG and ESG Data

ESG stands for Environmental, Social, and Governance and aims to evaluate a company’s collective conscientiousness in these areas and its active involvement. It is typically a score compiled from data surrounding specific metrics related to intangible assets within the enterprise.

So far, there are no official scoring methods or standard criteria, but rather a collection of sectors that ESG data addresses and evaluates.

Environmental practices include measuring energy and water use, air quality and emissions, waste, and pollution output. Other sustainability and recycling efforts such as packaging and environmental supply chains also come into play. A particularly high score in this category goes to companies focusing product innovation on ecological or environmental improvement and green revenue.

Social refers to the general approach to society, community, and individuals. The purpose is to measure the level of social equity, diversity, and inclusion. The criteria also include working conditions, health and safety, and support in career and personal development. Privacy issues are another area, as well as product quality, responsible marketing, and involvement in the local community.

Governance scoring evaluates the financial side of a business and its management structure. Shareholder rights, compensation plans, and secure financial management are taken into account. Also, the Corporate Social Responsibility (CSR) strategy is evaluated, and the level of ESG transparency and reporting.

Why is ESG Data Collection Increasingly Important?

Societies are realizing the threats to nature and the environment posed by industry and technology. In many parts of the world, awareness of social inequities is also increasing, and it’s likely the trend will keep growing. 

Investors expect companies to act responsibly in these matters. ESG scoring and ESG criteria are a way for investors to evaluate commitment to society and the environment. In many industries, companies have already integrated ESG factors into regulatory compliance risk management procedures.

We can point to three main reasons why ESG criteria are gaining relevance:  

1. Investors can expect higher returns and more stability from companies with a high ESG score. Companies investing in the consistent improvement of their ESG data become well-run companies and, in turn, profitable businesses. 
2. The number of start-ups being founded and existing businesses wanting to expand into new areas is growing. As a result, the competition for investment is intensifying. ESG scoring adds more information that helps potential investors evaluate and choose where to put their money.
3. There is genuine concern for environmental and social issues. Investors, like companies, feel responsible and aim to control their impact on the future of societies and their surroundings.

ESG Big Data – How to Obtain It?

With investors, customers, and authorities placing high emphasis on ESG criteria, the need for ESG-related data is enormous. Scoring processes rely on ESG data collection. However, because compliance isn’t mandatory, scoring systems vary, and companies can choose what they will or will not report. As a result, company reports are seldom enough to create an ESG score. ESG scoring companies must draw data from multiple other sources.

Government reports and statistics are credible sources of information, but it’s not always easy to pick out the relevant documents. Consulting firms need to sift through the internet ‘manually’ and scan a large variety of sites of government agencies and institutions to filter the required data. Obtaining official data can take time, and involve costs, especially because not all the information is easily accessible on the web. The Gov Data API from Webz.io provides ESG scoring companies with a feed of relevant government data that can easily be digested by machines.

Companies often come to rely on alternative data including satellite imagery, social media data, blogs, forums, discussions, etc. This is risky because the source and data might or might not be credible. News sites and reputable media outlets are safer sources for insights and our News API pulls the relevant information from these sites.

Nonetheless, alternative ESG data is not sufficient to deliver the full picture. Alternative sources provide partial coverage of the data published on official platforms can be one-sided, biased, or serve a specific interest. For a balanced and complete presentation of ESG facts it’s necessary to go to the official sources.

Challenges to ESG Data Management 

The scoring process can’t be completed if there are holes or gaps in the data. But regardless of whether official or alternative data, obtaining reliable ESG data is still a challenge. Among the top challenges enterprises are facing when creating ESG benchmarks are:

1. Definitions of ESG-related terms present a significant challenge in the assessment process. There is no unified standard, and the terminology used to describe or define factors and levels of severity varies in different parts of the world. Until unified standards are implemented, this can cause confusion and misunderstandings, which makes the collection of ESG data significantly more difficult.
2. Much of the important data isn’t available in real-time. ESG data providers are often faced with outdated information and historical statistics that don’t accurately picture the current situation. According to this survey by Ernst & Young, 46% of asset managers report limitations on the value of ESG due to the lack of real-time data (among insurers 41%, and among banks 35%).
3. The survey also reveals that data quality is an issue. 50% of asset managers find that the lack of forward-looking disclosure limits the value of ESG reporting. 
4. Another hurdle is the presentation and accessibility of ESG-related data. Much of the essential information is available in the form of written reports rather than data reports. This makes it harder to quantify and set scores.  
5. Alternative web data lacks standardization and demands a structuring process to actually deliver information.

Another survey conducted by Vanson Bourne among 250 US and UK businesses shows that less than 50% have access to the right public data to reach decisions on ESG-related issues.

The same survey also investigated ESG scoring companies’ internal challenges around data. Close to 70% reported a need for better software for data collection and distribution. Other challenges include a lack of professional staff and unclear governmental guidelines on data collection.

Can ESG Data Providers Help Reduce Investment Risks?

ESG compliance is still a developing concept, and it will take time until requirements and reporting become standardized. Companies should get ready for that and start including ESG data monitoring into their regulatory compliance risk management. 

In the meantime, investment management institutions incorporate alternative web data into their predictive algorithms, providing them with an edge in predicting the rise and fall of the markets with real-time big data. Alternative data is quickly becoming an essential component for mitigating investment risk, and ESG criteria play a significant role in this context.

Companies need to explore different models to help them overcome the challenges of obtaining high-quality ESG data so they can establish reliable compliance scores and reach investment decisions to generate high returns. It’s vital to get access to the latest web data in real time and that this data is absolutely dependable.  

With Webz.io’s Gov Data API, you can generate feeds of the latest government rules, regulations, ESG data, and more. You receive specific, dependable ESG data from official sources in real-time.