Sustain Advisory

ESG investments are booming and so is the market for ESG data and data providers.  According to a recent research by Morningstar sustainability-focused  funds doubled in the past 3 years counting, at the end of 2Q20, 534 sustainable or ESG  funds, with  assets under management above USD 250bn  –  Europe remain the largest market with three fourths of global assets.

https://www.morningstar.com/content/dam/marketing/shared/pdfs/Research/GSL_082520_Final.pdf?utm_source=eloqua&utm_medium=email&utm_campaign=&utm_content=24494

The surge in demand for sustainable investments in Europe has accelerated very quickly over the last 3 years following the introduction of the Sustainability Regulation by the European Commission and their adoption of the UN Sustainable Development 2030 agenda. As a result, EU policies have been introduced with the intention to clarify fiduciary duties and increase transparency in the field of sustainability risks and sustainable investment opportunities. While ESG data and ESG ratings have been traditionally provided by ESG data providers, today, with the advent of the Sustainable Finance Disclosure Regulation, Credit Rating Agencies (CRAs) are also required to include in there analysis and disclose the impact of ESG risk factors on the creditworthiness of an issuer. This regulatory provision has affected the business model and the strategic focus, for most credit rating agencies, as far as ESG competences, products, research, and market coverage.

The evolution of investors’ demand for ESG analytical content has driven a double-digit growth for ESG data market and triggered a fast consolidation of the market but also the emergence of new, high-tech, ESG data providers. The lions’ share of acquisitions was made by large CRAs: S&P Global acquired RobecoSAM , Moody’s acquired Vigeo Eiris , Morningstar-DBRS acquired Sustainalytics. This has been a fast-track strategy to cope with a surge in demand of ESG information and ESG research content by investors.

Investors seem to prefer to develop in-house expertise to build more sophisticated and nuanced ESG strategies, therefore ESG ratings are used primarily as benchmarks and as one of many metrics used to build ESG investment strategies. Investors are also keen to get ESG raw data from providers with large coverage and long dated historical series. This is driving a generalized increase in the price of ESG raw data and a shift in the profitability and business models of ESG rating providers.

ESG rating providers and CRAs have quite different roles and missions but also some intrinsic similarities. First, CRAs are subject to regulatory supervision while ESG data providers’ activities are currently completely unregulated. Secondly, CRAs basic data are corporates’ financial statements, while the underlying raw data for ESG ratings are non-financial information related to environment, social and corporate governance topics. Sustainability, however, is a key concept within most credit ratings methodologies, even though it is specifically tailored to the financial performances and implications of a company’s activity rather than to its wider economic, environmental, social context.  

Sustainability assessments are equations with multiple unknowns, and therefore there is a strong rationale for the integration of complementary competences and the opportunity for CRAs to expand their business model and innovate their analytical approach. ESG data universe is vast, and data are mostly managed with technologically advanced applications and tools, big data, AI and machine learning. CRAs analytical toolkits have changed truly little and mainly to address compliance-based requirements, it is time for them to embrace technology and make it more relevant within the analytical teams’ skill sets.