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Putting big data at the heart of ESG decision-making

ESG issues have always been important in the financial and corporate landscape, but over the past 18 months or so, it’s been taken to a new level. The COVID-19 pandemic has hugely increased the focus on the health and sustainability of our planet, together with pressing questions of social equality and cohesion. Climate change concerns have escalated, the Black Lives Matter movement has become a powerful force, geopolitical risks and tensions continue to create volatility — the list goes on.

Along with a continuing focus on governance, ethics and compliance, all of these factors have combined and coincided to propel ESG to new levels of significance. And they are being particularly championed by the Millennial generation — that is about to inherit probably the biggest transfer of wealth ever seen over the next two decades as baby boomers pass the baton. Millennials want to know not just how much return an investment will make, but how it will make that return and at what cost to people, planet or communities.

This means that investments have to be repurposed toward something more meaningful than straight returns. Increasingly, institutional as well as individual investors are throwing their weight behind this — becoming the main drivers for change in financial markets.


ESG data challenge

The investor sentiment shift toward conscientious society, a greener planet and improved governance practices is driving all financial institutions, whether big or small, traditional or fintech, to be fully cognizant and in control of the ESG profile of their investment and underwriting positions, and embed ESG considerations into their reporting and risk management frameworks.

But doing so is not straightforward. Whereas financial reporting is standardized and in familiar formats, corporate reporting around ESG dimensions is anything but. Companies are not obliged to report most ESG-related information; therefore, practice is fragmented and disparate. There are few common templates, meaning that companies will publish different information in different ways. There are a multitude of surveys in the market, but these only offer limited help: companies participate in some surveys but not others, and might answer slightly differently each time.

Much ESG information is also self-reported. Inevitably, this opens the possibility of ‘greenwashing’. Understandably enough, corporates are keen to paint themselves in the best light possible.


Two speed market

Cutting through the noise, obtaining relevant information quickly, and analyzing it effectively is, therefore, much harder than perhaps it needs to be. We have also seen the opening of something of a two-speed market. Big global institutions across banking, fund management and insurance have been highly active in either building their own in-house data analytical capabilities for ESG such as State Street, Goldman Sachs, JPMorgan or acquiring one of the new breed of fintech data aggregators — or a combination of both. M&A in this space has been prolific. For example, Blackrock recently bought Baringa’s Climate Change Scenario Model and integrate it into its Aladdin risk management framework,21 while HSBC Asset Management bought a stake in Radiant ESG,22 a US-based ESG asset management startup.

This means that the big institutions are able to track data signals across multiple sources and decipher them almost instantly. They can react to breaking news and adjust their positions in response.

In recent years, even large credit rating agencies and market data providers went on a buying/acquiring spree to remain competitive and cater to the ESG and sustainability related demand.

The excerpt was taken from the KPMG Thought Leadership publication entitled Pulse of Fintech H1’21.