The Evolution of ESG Data Markets in Financial Services
In response to surging demand from financial institutions, ESG (Environmental, Social, and Governance) data markets are undergoing rapid transformation. These changes are significantly reshaping the landscape of ESG data usage within the financial sector.
Market Evolution to Meet Demand
The ESG data market is in a state of evolution, driven by the escalating requirements of financial institutions, their investors, and regulatory bodies. While major vendors have traditionally dominated this market, there is now a rising presence of specialized data providers catering to specific niche demands within the financial sector.
Scale, Growth, and Maturity
ESG data markets are expanding both in scale and maturity, reflecting the increased day-to-day utilization by virtually all financial institutions. This growth has surpassed the market’s status just two years ago. In 2021, ESG data providers reported revenues exceeding $1 billion, with a potential increase to $1.3 billion in 2022.
Driving Factors: Investor Demand and Regulation
Investor demand stands as a pivotal driver for the growth of the ESG data market. Financial institutions boasting robust ESG offerings are gaining a competitive edge over their counterparts. This demand is further bolstered by regulatory initiatives, which actively shape the ESG data landscape. More institutions are falling under the purview of mandatory European disclosure rules, and emerging regulations in the US and Asia are poised to stimulate demand in these regions. Asset managers lead the pack in terms of ESG data expenditure, making up 59% of all buyers, followed by insurers and other institutional investors.
Geographical Dominance
Europe’s ESG data markets take the lead globally, with European organizations accounting for a substantial 60% of global spending on ESG data. However, other regions are rapidly catching up. The US, in particular, has witnessed a significant shift in attitudes toward sustainability since 2020, resulting in a growth in ESG data providers. The Asia-Pacific (APAC) region has also experienced an uptick in data providers offering some coverage, albeit typically not as comprehensive as in Europe. In contrast, ESG data markets in the Middle East and Latin America remain relatively small.
Market Structure and Players
ESG data markets are marked by a hierarchical structure. A handful of major vendors dominate the market, followed by a second tier of competitors, and a long tail of specialized data providers. Emerging niche operators often aim to address specific data coverage gaps but frequently find themselves acquired by larger incumbents aiming to provide comprehensive solutions. If this trend continues, it is likely to shorten the market’s long tail as the industry matures.
Technology-Related Barriers
Leading data providers maintain their positions, largely due to significant technology-related barriers that hinder switching. While users may make minor adjustments to their data suppliers, wholesale changes pose considerable challenges. Large asset managers, for instance, require over a year to switch between core suppliers due to the complexities of integrating multiple data types into core technology systems.
Expanding Data Coverage and Categories
ESG data vendors continue to broaden their coverage across various asset classes. Public markets, sovereign instruments, and listed real estate assets are witnessing substantial growth. Private markets are also expanding, although limited data availability for small and medium-sized enterprises (SMEs) results in a concentration on larger unlisted companies. Specialized data providers primarily cover other alternative investments, such as land or real assets. Moreover, ESG data coverage extends beyond climate-related factors, encompassing other environmental issues and social priorities. Biodiversity, for instance, is emerging as a nascent data category receiving increased attention from providers.
Challenges in Data Quality
Despite the increased availability of ESG data, quality remains a concern. Scope 3 emissions data, in particular, faces limitations due to shortcomings in underlying disclosures, forcing data providers to heavily rely on interpretation and proxy metrics.
Quality and Consistency Concerns
Users of ESG data frequently express dissatisfaction with the quality and consistency of ESG scores. Inconsistencies across data providers can be stark, with different providers assigning vastly different ratings to the same companies. This variation poses challenges for investment decisions, as some users may selectively choose ratings that align with their preferences rather than making optimal choices for investors.
Growing Costs and Risks for Users
Users of ESG data face increasing costs and risks due to data quality issues. Many financial institutions find it challenging to rely on a single data provider, leading to a blended approach that involves multiple data vendors. However, this approach not only duplicates external costs but also necessitates additional in-house spending to analyze, compare, and curate ESG data. Consequently, many larger users have established their own ratings teams, creating proprietary scores that draw from various third-party data sources.
Regulatory Appetite
The lack of consistency, standardization, and independent assurance in ESG data markets is a growing concern. Regulatory bodies are showing interest in regulating leading data vendors. Initiatives, such as a European Commission consultation on ESG ratings, aim to assess potential interventions in ESG data markets.
Importance of Robust Data Management
Many users could more efficiently and effectively utilize ESG data. The lack of central coordination often leads to haphazard acquisition of multiple ESG data licenses, resulting in cost duplication and data management confusion. Additionally, firms often fail to maximize the value of the data they purchase, both in terms of utilizing all available data and identifying potential applications within their operations.
Strategic Data Management
In response to these challenges, strategic data management practices are gaining traction. Integrating ESG data into enterprise-wide data management strategies can enhance efficiency, reduce costs, and facilitate effective data governance. ESG data’s increasing integration into investment decision-making and regulatory reporting underscores the need for robust data management.
Looking Ahead
ESG data markets remain dynamic, with data coverage and categories advancing rapidly. While there are still gaps and inconsistencies to address, industry leaders and new entrants continue to drive improvements. Collaboration on industry platforms and regulatory initiatives, such as the European Single Access Point (ESAP), are expected to enhance data availability, quality, and accessibility. As regulations like the Non-Financial Reporting Directive (NFRD) and Sustainable Finance Disclosure Regulation (SFDR) take full effect, the availability and quality of reported data should further improve.
Despite these advancements, it is likely that many users will continue to rely on multiple data providers in the foreseeable future. The good news is that there are actions users can take now to trim costs, reduce risks, and maximize the value they derive from ESG data. The following focus areas will be critical to any ESG data strategy:
- Migrating to a single data layer supporting all ESG use cases and accessible to all involved teams, reducing cost duplication and data inconsistency risks.
- Utilizing a data model that integrates key ESG frameworks into a single data model and visualizes data lineage to identify overlaps between different frameworks and rationalize external data sources.
- Embedding an ESG data governance operating model to streamline data governance activities, providing a holistic view of priority data management initiatives.