Four Things No One Will Tell You About ESG Data

Summary of Study

Bottom Line: As the environmental, social, and governance (ESG) investing movement continues to grow, it is crucial to shed light on and examine concerns about several important aspects of ESG measurement and data. In short, this expanding community needs to develop a more rigorous and systematic reporting of ESG information. The current analysis focuses on a number of different aspects inherently involved in ESG, such as data inconsistency, data verification, and the need for “benchmarking.” Companies would be well advised to take control of the ESG data narrative by proactively shaping disclosure instead of being overwhelmed by survey requests. Companies should therefore ‘customize’ their metrics to some extent, while at the same time seeking to selfregulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability.

The demand for information that captures how organizations utilize different forms of capital—natural, social, and intellectual, as well as financial—to provide their products and services, and how their activities affect society through positive and negative externalities, has led to the creation of environmental, social, and governance (ESG) metrics and related corporate reporting efforts.

This has given rise to a proliferation of ESG reports, associated ESG data and ratings, and companies trying to develop a more rigorous and systematic reporting of ESG information.

As the ESG finance and investment field continues to grow, it is important to document the concerns over many vital aspects of ESG measurement and data.

This study is meant to be a useful guide for the rapidly rising number of people and firms entering the field, in terms of measuring, analyzing, and communicating ESG activities and outcomes.

There are many problems associated with ESG that must continually be addressed. 

For example, ESG data imputation and data inconsistency are worse than most probably realize, and data providers often disagree even when there is publicly available information.

The following is the four-point focus of the study: 

  • The sheer variety, and inconsistency, of the data and measures, and of how companies report them. The authors show how such inconsistencies lead to significantly different results when looking at the same group of companies.
  • Benchmarking,’ or how data providers define companies' peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market‐wide inconsistencies and undermines their reliability.
  • The differences in the imputation methods used by ESG researchers and analysts to deal with vast ‘data gaps’ that span ranges of companies and time periods for different ESG metrics can cause large ‘disagreements’ among the providers, with different gap‐filling approaches leading to big discrepancies.
  • The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for ‘a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.’

 

Read the full study here.

Feature Charticle
Example of a Normal Distribution Describing Observed (Real) Data of Performance
on an ESG Metric From a List of Companies

Harvard Business School

Findings: 

  1. Companies should take control of the ESG data narrative by proactively shaping disclosure instead of being overwhelmed by survey requests. 
  2. To that end, companies should ‘customize’ their metrics to some extent, while at the same time seeking to self‐regulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability. 
  3. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.

Read the full study here.