Tips for Overcoming ESG Data Selection Challenges
By Gediminas Rickevicius, VP of Global Partnerships at Oxylabs
Environmental, Social and Governance (ESG) guidelines promise better investment outcomes with multiple benefits for citizens, the environment and the economy. Despite the perceived benefits, challenges continue to emerge with establishing ESG ratings and collecting data.
Developing industry-wide standards is part of the solution, but companies can also take steps to establish a framework when analyzing datasets and company rankings. Web scraping is an additional solution that allows companies to have actionable data when verifying ESG scores.
What are ESG criteria?
ESG guidelines attempt to assess investment results with a focus on environmental, social and corporate governance objectives. The environmental criteria mainly concern the reduction of waste and greenhouse gas emissions and the management of water supply. The social guidelines assess companies on their activities related to consumer protection, employee welfare and welfare, financial activities (such as lending), human rights and impact on the community.
The third component of the ESG guidelines includes promoting diversity, equity and inclusion (DEI). These programs and policies seek to promote equal participation of individuals based on group identity factors such as gender, complexion, culture, age, sexual preference and religion.
ESG investing is growing
According to Bloomberg, ESG investing will reach $53 trillion by 2025. Individual shareholders also express their support for social and environmental proposals, moving from 21% to 32% between 2017 and 2021.
Currently, global assets under ESG management amount to $35.3 trillion in the United States, Canada, Japan and Australasia. European companies are leading the way with more than 50% of investment assets under management in line with the EU’s 2016 ESG Global Mandate.
How ESG ratings are calculated
ESG scores or ratings are based on a company’s success in meeting its environmental, social and governance responsibilities. Although some of these responsibilities have material consequences, most are important to stakeholders for non-financial reasons.
ESG ratings are not established by a standard system. Instead, there are several ESG rating agencies that provide investment ratings based on a company’s ESG performance. Most of these agencies have different methodologies when assigning ESG scores, making it difficult for investors to understand a company’s performance in real terms. Additionally, these calculations are usually based on a company’s “perceived” activities and may not take into account all of the positive practices in place.
ESG rating factors
ESG rating factors vary significantly from agency to agency. Factors that contribute to the overall rating typically include:
Environmental rating factors
Environmental rating factors can include commitments to renewable energy, climate change, water pollution, soil contamination, and waste generation.
Social rating factors
Social rating scores are primarily based on relationships with employees, shareholders, suppliers, and partners. Factors that determine this rating include employee compensation, workplace safety, health benefits, and working conditions of operations located in other parts of the world.
Corporate Governance Rating Factors
The corporate governance rating is based on onboard activities, regulatory compliance and legal operations. Factors that influence this rating include compliance with federal, provincial, state, and municipal laws, executive compensation, and whether the board includes people from different identity groups.
ESG data challenges
The ESG space faces many challenges that relate specifically to scoring and regulation. Some of the more frequent criticisms underlying this framework include:
Inconsistent scoring methodologies and data standards
In the absence of a regulatory framework, rating agencies typically use different methodologies, resulting in different scores for the same company. Additionally, it is difficult to quantify facts such as biodiversity investment, carbon footprint, and what constitutes a “diverse” management team. In addition to the lack of a consistent framework, companies are not using standardized data sets over different time periods, leading to inconsistent conclusions about a company’s ESG compliance.
Greenwashing is a deceptive marketing practice that attempts to convince investors that an organization is committed to achieving sustainable environmental goals. The overall aim is to include the company in sustainability indices for inclusion in investment portfolios and to promote a positive public image.
How to choose ESG data
Despite the challenges facing ESG investing, companies can take steps to obtain relevant data when evaluating sustainable investments. Here are some tips when formulating a strategy:
Define company-specific ESG objectives
Ethical investing is more than just a passing trend. Digital innovation allows investors of all demographic groups to see the effects of business activities around the world.
Creating company-specific ESG goals can pay off from a retail perspective, especially with young millennial investors. According to a recent report, millennials increased sustainable investments from $5 billion in 2015 to $51.1 billion in 2020. Today, investors are more concerned than ever with the power of their money – and investment firms are responding by creating funds that align with current global issues.
Assess data quality
Companies should verify the completeness and transparency of the data. Reports on a limited data set may not provide the full picture considering source and methodology. Additionally, some datasets have gaps that make the data inaccurate and unreliable. Choose a provider that continuously tracks metrics to produce timely and relevant data.
Collect data with ethical web scraping
In the absence of consistent data sets, many investment firms choose to obtain their own data with web scraping – a process that extracts public information from websites.
Web Recovery may be used to collect publicly available ESG data from multiple sources, including company websites, online directories and other sources. Areas of interest for ESG investors may include:
- Investment in sustainable energy
- Air quality
- Health and safety procedures
- Waste removal
- Employee compensation and benefits
- Shareholder rights
- Diversity, Equity and Inclusion
- Board Structure and Mandate
Companies that choose to collect public data can employ an in-house team or use a custom web scraping tool to extract data from any public source.
Learn more about scraping critical ESG data
Financial firms are increasingly using web scraping to extract ESG and alternative data critical to successful investment decisions. To download “Alternative data drives key decisions in UK and US financial sectors– our free white paper that explains:
- The prevalence of alternative data in the global financial sector
- Regional differences in the finance sectors in the UK and the US
- Most Valuable Data Extraction Methods
- Data Mining Challenges
- Emerging Data Collection Strategies
ESG investing has grown significantly in recent years and is expected to increase. Download our whitepaper to learn more about data mining solutions that support precision investment strategies and are ESG compliant