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Understanding the ESG Data Value Chain
Posted by Janelle Metzger

Environmental, Social and Governance (ESG) metrics are not part of mandatory financial reporting, however, investors are increasingly applying these factors to their analysis in order to identify material risks and growth opportunities. As part of the ESG data value chain, the following three factors are key for investors: 

  • Negative screening refers to the exclusion of companies and certain sectors based on ethical, social, environmental, or religious factors. Most commonly, exclusionary strategies avoid investments in companies that are fully or partially involved in gambling, alcohol, child labor, human rights violations, tobacco, and other related factors. 
  • Positive screening involves the inclusion of companies due to the social or environmental benefits of their products, brand value, leadership team, or processes. Investors place a ‘premium’ on these ‘best in class’ businesses which ultimately increases their value. 
  • Shareholder engagement and proxy voting leverage shareholder rights to drive progressive change in investee company behavior. They can often be drivers of success, transparency, and accountability, resulting from a demand for better ESG-related disclosures and effective social and environmental impact.

In our latest report, ESG Data, Impact Criteria and Measurement, we map out the ESG data flow from companies to investors - from collection, processing, and assessment to usage.  

ESGDataValueChain

Benchmarking, data ubiquity, and quality are acknowledged as barriers to ESG analysis. In fact, a recent survey completed by the Chartered Financial Analysts (CFA) Institute found that “78% of practitioners surveyed believe there is a need for improved standards around ESG products to mitigate greenwashing… greenwashing means conveying a false impression or providing misleading information or a misleading narrative about how a company and its products are environmentally sound or positive in an ESG context.”  

Without a source of truth or rubric of success, investors are left having to independently assess ESG disclosures, despite disparities in data availability, timeliness, quality, methodology, or even ESG definitions. The self-reporting nature brings the credibility of ESG data into question.  

We are optimistic that cohesive, methodical reporting and transparency are on the horizon. Armed with a standardized data framework, investors will be able to make smart, informed, and socially responsible financial decisions - the holy grail of ESG.

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