In the era of responsible investing, an investment firm’s chief asset is increasingly data. Without the right data on companies’ ESG performance, portfolio managers and their teams are flying blind, unable to identify and retain the right companies to please their investors and hit financial or sustainability targets. But for the most part, investors are unsatisfied with the quality of the ESG data available through third-party providers. While investment firms are rapidly becoming more sophisticated in their approach to ESG, third-party data providers (and issuers themselves) have been slow to the party, offering overly simplistic, inaccurate, outdated reflections on a given company’s ESG performance.
Here, we explore the problems investment teams are experiencing with ESG data today, why it matters, and what forward-thinking firms can do about it.
What’s missing in third-party ESG data?
There are a number of gaps in the kinds of ESG data (e.g. GHG emissions, targets, transition plans, social metrics, etc.) available publicly today, and each one presents a unique challenge to investment teams.
Standardization and comparability
While voluntary and mandatory sustainability reporting guidelines offer promising standardization, the quality of disclosures created based on these guidelines varies dramatically, leading to a world where every company is reporting on their ESG data differently. Add to this the fact that there is no standard sustainability reporting deadline, and sustainability data is often included in financial reports but does not always match up to financial reporting periods.
ESG rankings, designed to address this confusion, have only contributed to it. The sheer number and variation in ESG ratings providers is a problem, with the ESMA identifying no less than 59 individual ESG score providers in the EU alone.
Even if third-party ratings suggest one company is better than the other, the variability in reporting and lack of transparency in ratings methodologies makes it difficult to determine why this is the case. Thus, it is very difficult to know which companies in any particular industry are leading on climate, making it hard for investors to know what “good” looks like, and where they should focus their investment decisions.
Nuance and transparency
Most third-party data providers offer ESG data in the form of an ESG ranking or score — but environmental, social, and governance risks are extremely complex and are rarely well represented in a single score. These scores don’t necessarily align with globally accepted disclosure standards, and most providers won’t disclose their methodologies for calculating these rankings or source the supporting documents and data points referenced in the calculation, meaning investment teams can’t validate the data (without doing their own research — more on that later). To fill the gaps and get greater confidence in their ESG data, some large firms have subscribed to multiple data providers, but smaller firms understand just how prohibitive the costs of these subscriptions can be.
Quantitative over qualitative
ESG rankings are numerical, but a true evaluation of ESG performance requires an analysis of both quantitative and qualitative data. Many critical elements of a company’s ESG strategy, such as its approach to corporate governance or risk management strategy, cannot be captured in quantitative metrics.
Accuracy and recency
Perhaps a consequence of the lack of nuance and transparency is the unfortunate reality that much ESG data available today is at best misleading and, at worst, entirely wrong. Third-party data is notoriously inaccurate, sometimes referencing emissions data from the wrong year, prompting teams to spend hours verifying the information. Many investors use ‘E’ scores as a proxy for climate risk management, but a 2022 OECD report found that “high E pillar scores are not directly aligned with decarbonization, low GHG emissions, or low carbon intensity and do not serve as a useful measure for assessing a company’s management of climate-related risks and opportunities” (CFA Institute, 2024).
One central location
Investment firms that go looking for ESG data independently soon discover that there is no central repository for ESG data globally. Because every company discloses against different standards and at different times, investment teams must be very organized (and motivated) to hunt down the right ESG information and then process and compare this data in their evaluation process. Third-party data providers emerged as a solution to this problem, but in solving for efficiency, they failed to provide the necessary nuance and insights investors can glean from reading (or at least skimming) entire reports or disclosures.
Investment teams can’t afford DIY research
When ESG rankings or third party data fall short, many firms supplement with their own research. It may seem like a smart move initially, but reality soon dawns. Getting the right data at the right level of detail to understand a company’s ESG standing is a painstaking process, one that involves combing through regulatory filings, sustainability reports, and more, often going back many years, to piece together a company’s past, present, and future ESG outlook. This might not be a problem if investment teams only had to evaluate a handful of companies, but the reality is that these teams need to evaluate dozens, if not hundreds of companies before making an investment decision. And who has the time for that?
Why should investors be concerned about inadequate ESG data?
Investors must be able to trust their ESG data. Inadequate ESG data may lead investors wrong in two ways: either it leads them to invest in companies with a falsely rosy appearance of ESG performance, or it leads them to overlook companies whose strong ESG practices are not represented in their ESG scores.
Better ESG data is a competitive advantage for firms whose clients are looking for specific ESG criteria, helping investment teams fulfill client requirements for responsible investment. Additionally, ESG risks translate directly to financial risk (and therefore portfolio underperformance), and the resulting compliance and reputational risks for the company and its investors are also serious concerns.
Introducing a new kind of ESG intelligence for investment teams
A new kind of ESG intelligence is available for investment teams — one that solves the current data gaps in the market and helps teams prioritize engagement over analysis by doing the manual work for them.
Benchmarking
Manifest Climate is the leading climate intelligence tool for investment teams. Our ESG data platform provides comprehensive ESG insights for any company with public reporting on demand using AI, allowing investment firms to benchmark issuers against their sector, industry, and custom-selected peers. This makes it easy for companies to identify ESG leaders and laggards, offering a clear indication of what “good” looks like.
Standard-specific data
Rather than providing broad ESG ‘scores’, Manifest Climate offers detailed breakdowns of how well companies measure up to relevant global standards such as the ISSB, SEC, TCFD, CSRD, and more.
Highest quality data
The data presented within Manifest Climate is raw, allowing you to to reach your own conclusions on ESG performance, rather than relying on a single ESG score. All data is fully traceable, with all surfaced information referencing source documents (such as a particular page in a sustainability report) so teams can dig deeper in any given area.
Automated and intelligent
Using AI to scrape the web for voluntary and regulatory reports, Manifest Climate saves your team countless hours that would typically be spent manually searching through documents for the data they need. Our centralized database keeps teams organized, allowing for more efficient and effective decision-making processes.
Ultimately, Manifest Climate allows investment teams to access more accurate qualitative and quantitative data, as well as audit trails behind this data, so that teams can fulfill responsible investment requirements.
Conclusion: New data for a new era of ESG
The rise of ESG investing has opened eyes to the reality that good intentions are not enough. Investment firms that make responsible or sustainable investing a priority need to be absolutely sure that their investment decisions reflect their ESG-related criteria and principles — and they need the right data to do so. While third-party providers offer convenience at the cost of real insight, manual research gives investment teams what they need, but not at the speed and scale required.
Fortunately, solutions to both problems exist. The firms that seek out and use these solutions to their advantage will keep their investors happy and manage their own reputational risk, but also make a lasting impact in the green transition.
