When we talk about ESG analysis, the complex question of data processing is often overlooked. In order to make investment decisions, managers must collect data, verify it, and ensure transparency in its transformation process. These steps are as crucial as they are complex for financial institutions, who are often ill-equipped to carry them out effectively.
A fund that promotes sustainability in its strategy must be able to conduct ESG analysis on the majority of the securities held. It must therefore be able to retrieve a minimal set of ESG data for:
However, according to a study conducted by WeeFin on the transparency level of ESG funds, 20% of the funds commit to ESG coverage rates that are too low considering their stated level of ambition.
This figure highlights the difficulties in accessing ESG data.
To collect ESG data, investors turn to data providers. These can be public, private, or even directly from portfolio companies. Private data sources are numerous and expensive. Alternatively, public data sources are numerous and expensive. The alternative is to use publicly available data sources. However these still require a large amount of intervention that can be both costly and time consuming. Regardless of the option chosen, the time and technical expertise required to set up an internal data collection process constitute obstacles to data acquisition.
Finally, the lack of data availability is also a key challenge, and this will persist as long as foreign regulations do not align with European requirements, such as the CSRD. This directive imposes strict obligations for companies to publish extensive sustainability-related information.
Once collected and prior to utilisation, ESG data must be verified to ensure quality and consistency. Without controls, a fund could be led to invest in companies that are not aligned with the stated sustainability strategy, regardless of its level of ambition. As a result, investors may be exposed to greenwashing risks.
The need to verify ESG data is a topic that regulators are focusing on. The French regulator, for example, emphasised, when publishing the results of its SPOT controls, the importance of controlling and verifying all ESG data used. However, 33% of the funds analyzed in our study do not appear to declare such controls.
After data retrieval and quality controls, financial institutions transform the data to create methodologies in order to integrate ESG into the management of their funds. These integration methods can take various forms, such as sectoral and/or normative exclusions, consideration of SDGs, or ESG ratings.
For all the methodologies employed, financial institutions must be transparent. By sharing clear and understandable explanations, they will enable the final investor to understand how the fund integrates ESG.
However, according to our study, only 37% of funds describe the methods applied to consider SDGs within the framework of the DNSH test. And only 32% are fully transparent about scoring methodologies, providing information on indicators, weights used, and the limitations of this methodology.
Are these figures the result of a lack of communication or a reflection of difficulties in understanding and using the collected data?
While both factors must be considered, we observe every day the misunderstanding of financial institutions using ESG scores in their sustainability strategy regarding data providers' methodologies. A phenomenon already noted by regulators, as the European Commission proposed a set of requirements in June 2023 to regulate ESG data providers, aiming to increase transparency and comprehensibility of their rating methodology.
Through our ESG Connect platform, we support financial institutions in these 3 steps so that their teams can ensure investments are aligned with their convictions.
