Understanding the ESG Data Ecosystem

Arun Kelshiker

20 years: Asset management and stewardship

In this video, Arun unpacks the fast-growing ESG data market and the role it plays in sustainable investing. He explains what’s driving its expansion, who the major data providers are, like MSCI, S&P Global, and Sustainalytics, and how their different methodologies impact ESG ratings. He also highlights key challenges such as low rating correlations and transparency issues, and discusses how ESG data influences investment strategies in a world moving toward greener finance.

Sustainability Measurement

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Understanding the ESG Data Ecosystem

13 mins 46 secs

Key learning objectives:

Understand the rapid growth of the ESG data market and its key drivers
Identify the major players in ESG data provision and their methodologies
Understand the challenges and concerns investors face with ESG data and ratings
Understand how ESG data integration influences sustainable investment decision-making

Overview:

The ESG data market has grown rapidly, driven by regulations like SFDR and CSRD, with major players like MSCI and S&P Global dominating. ESG data is critical for sustainable investing, encompassing raw and processed data, ratings, and scores that guide investors. Providers like MSCI, S&P, and Sustainalytics use diverse methodologies to assess ESG risks and opportunities. However, challenges persist, including methodological divergence, transparency issues, and low correlations among ratings providers, complicating investment decisions. Despite these challenges, ESG data and ratings continue to shape portfolio strategies, driving sustainability in finance and enhancing investment decisions for a greener future.

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Summary

What is driving the growth of the ESG data market?

The ESG data market has expanded rapidly, fueled by global regulations like the EU’s Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD). In the US, the SEC’s Climate Disclosure Rule further boosts demand. Companies are investing in ESG reporting software and services, while investors increasingly rely on ESG data to inform sustainable investment strategies. By 2024, the ESG data market is expected to reach $2 billion, reflecting growing recognition of sustainability’s role in finance and compliance.

Who are the major players in the ESG data and ratings industry?

The ESG data market is dominated by key players like MSCI, with a 25% market share, followed by S&P Global, ISS ESG, Moody’s, and Sustainalytics. These providers offer comprehensive ESG services, including raw data, indicators, scores, and indices. Startups like OWL ESG and Truvalue Labs also contribute innovative, AI-powered ESG tools. Together, these companies shape the sustainability landscape, enabling investors to incorporate ESG considerations into their decisions.

What methodologies do key ESG providers use for ratings and scores?

MSCI: Uses a single materiality approach, with over 90% quantitative indicators, offering ratings on a AAA-CCC scale
S&P Global: Employs a 0-100 scoring system based on performance metrics and policies, assessed through its Corporate Sustainability Assessment
Sustainalytics: Focuses on absolute ESG risk ratings, using five risk categories and a double materiality approach

These diverse methodologies highlight varying priorities, from financial materiality to broader social and environmental impacts.

What challenges do investors face with ESG data and ratings?

Investors grapple with transparency issues, biases in methodologies, and low correlations among ESG ratings, complicating comparisons. The MIT Aggregate Confusion Project found average correlations among ESG ratings providers were just 0.6, compared to 0.9 among credit rating agencies. Divergences arise from differing measurement indicators, scopes, and weighting systems. High reliance on ratings from dominant players also limits competition and innovation in the ESG data market.

How does ESG data shape investment decision-making processes?

ESG data guides portfolio construction, risk management, and sustainable investment strategies. Raw and processed data inform ratings that investors use to evaluate corporate sustainability practices. For example, MSCI provides ESG ratings for over 6,000 companies, helping asset managers align portfolios with sustainability goals. However, methodological differences and biases necessitate careful interpretation to ensure accurate assessments of ESG risks and opportunities.

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Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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