Looking for the ESG signal amongst the noise
ESG and Climate & Sustainability (C&S) data are two sides of the same coin.
In essence, companies create ‘ESG signal’ amongst the noise of sustainability reports & commitments (such as Net Zero & SBTi), company announcements, social media posts, regulatory reports, investor relation decks etc, and investors are searching for that ESG signal, often using data acquired from ESG data providers - who use web scraping tools and other techniques to harvest data on companies and turn that data into proprietary ESG scores & ratings.
Investors use that ESG data, ratings and scores to inform their investment decision making process.
Implementing C&S systems will lead to higher fidelity ESG signal
As companies implement C&S solutions and integrate them into their business systems, their ability to create, collect, integrate, analyse and action C&S data will improve dramatically.
This should generate much higher fidelity ESG signals. - which in turn will be picked up by investors.
This may convey competitive advantage to those companies who move quicker - as higher ESG scores & ratings tend to lead to preferential access to capital and potentially help burnish the sustainability credentials of the company and its brand.
Let’s dig into an example…
Carbon accounting software enables companies to develop consistent, auditable carbon emissions data across scopes 1 & 2 and ideally scope 3 (their supply chain). As organisations mature their data processes, they automate much of their data collection, their data coverage increases, and they can collect that data much more frequently (moving from once a year to once a quarter or month - even daily for some data).
Once organisations integrate this data into their enterprise data stores and business systems, their ability to make strategy and operational decisions that incorporate C&S data is vastly improved.
There are many emerging examples of this - here are just a few:
Companies introducing an internal carbon fee to make business divisions financially responsible for reducing their carbon emissions
Product teams using carbon data to model new products, or reduce the carbon intensity/ emissions of existing ones
Business travel apps that incorporate carbon data to allow users to choose lower carbon options
Cloud management software which enables users to optimise their workloads with carbon emissions and intensity as key parameters.
This in turn creates higher fidelity ESG signal which is picked up on by ESG data providers and investors.
Why do investors buy ESG data
Investors of all kinds (capital & private markets) are being incentivised to include ESG criteria as part of the decision making process in their investments. An ESG data market has sprung up to provide that data to those investors.
Much of the ESG data is scraped from the internet, and can include hundreds of data points. One common criticism of the ESG data providers is that the methodologies they use to score and rate companies is opaque and not comparable to each other, making it difficult for investors to integrate multiple data sets from different ESG data providers.
Imagine if Moody's, Standard & Poor's, and Fitch all provided very different ratings and scores - this would cause of lot of confusion and headaches with the investor community - as it is today with ESG data.
Higher fidelity data that is consistent and more comparable across companies will be a boon to the investment community - as well as the organisations that are actively transitioning their business & operating models to compete in a more sustainable, low carbon economy.
It will also be easier to spot the laggards and outliers in this transition.
Summary
Organisations that operationalise their Climate & Sustainability data create higher fidelity ESG data - which in turn enables ESG data providers and the investment community to more easily discern, benchmark and compare companies.
CEO’s and CFO’s can use the higher fidelity ESG signal that their organisation generates to create competitive advantage, via preferential access to capital and improved brand perception.