Buy-side firms are having to user a greater number of ESG data providers in order to make up for the lack of corporate disclosures around sustainability.
However, by casting a wider net to capture the data they need to meet their regulatory requirements, firms then have to manage the inconsistency of the data and the challenge of comparing data from different vendors all with their own methodology for calculating sustainability impact.
The research, commissioned by cloud-based data management provider Alveo, found that 71% of executives at buy-side firms globally use more than five data sources with the average number calculated as 9.3.
The majority of firms (74%) are relying on external ESG rating services for the bulk of their data. More than half (57%) are also using third party expert opinions for factual information such as carbon emissions.
The least common source of data are the corporates themselves. While the use of ratings services helps manage the shortfall in information, it creates more issues in terms of data management.
ESG data and corporate disclosure around sustainability have become a priority for investment firms and asset managers since the introduction of various reporting regimes around sustainability.
Chief among these is the EU's Sustainable Finance Disclosure Regulation (SFDR) which came into effect in March 2021 and requires asset managers to disclose the credentials behind any investment products labelled as sustainable.
The idea behind the SFDR is to mitigate the effect of so-called 'greenwashing' and to protect the credibility of the growing but still nascent sustainable investment market.
The level 2 measures of the SFDR are due to come into effect in January 2023 which will require more disclosure from corporates as relates to their prinicipal adverse impact statements.
However, with other regimes in the US, UK and elsewhere all set to introduce their own rules, there is concern about a possible lack of international harmony in terms of the requirements facing firms.
“Asset management firms are looking to materially ramp up their ESG data management to fast-track the supply of consistent, aggregated ESG content to different stakeholders. Firms are looking to make use of the latest technologies for ESG data analysis but material issues in data quality can hamper the effectiveness of these,” said Mark Hepsworth CEO at Alveo.
The concern over data inconsistency has also triggered a wave of consolidation between different ESG ratings firms as well as market data vendors and also exchanges.