The Importance of Technology in ESG Investing
Technology in the form of data providers and software programs has enabled environmental, social, and governance (ESG) companies to improve their disclosures.
ESG software programs are used by companies to optimize data collection and produce high quality disclosures for investors. Many of these programs generate their data from ESG data providers such as Sustainalytics, Bloomberg, FTSE Russel, and MSCI. These companies are recognized as the top data providers for the ESG field.
Technological advancements in data analyzation, such as artificial intelligence, have enabled data providers to increase the amount of data collected and thereby increase the actionable insights given to ESG companies.
These actionable insights are essential for companies to improve their ESG framework. Data providers will include both qualitative and quantitative metrics to gauge the three pillars of ESG.
Types of ESG Data Providers
Data providers are classified by the type of data that they collect and analyze. The three main types of data providers are:
- Market Based: measures industry trends and investment performance regardless of ESG status
- ESG Generalist: evaluates all three pillars of ESG
- ESG Specialist: data is specific to a singular pillar of ESG
Here is a statistical breakdown of ESG specialist data providers and their focus: 70% environmental, 25% governance, and 5% social.
Unsurprisingly, an overwhelming number of ESG Specialist data providers focus on the environmental aspects of ESG. Many companies starting their ESG framework will prioritize environmental initiatives before pursuing social or governance-based standards. This is largely motivated by investors' concern for climate change and their demand for environmental data transparency.
Companies have increased spending on ESG data by 20% in the last year. Most likely this percentage will continue to increase as investors push for mandatory climate disclosures.
ESG Software and Reporting
The implementation of ESG software adds credibility to the data companies will later disclose to investors. Access to accurate and reliable data is paramount to potential investors and may eventually be mandatory with the proposed U.S. Securities and Exchange Commission (SEC) climate disclosure rule.
ESG companies who are looking to strengthen their reporting capabilities should utilize an ESG software program that automates the data collection process, analyzes data for anomalies, extrapolates data to seamlessly create impact reports, and is intuitive to use.
A software program that is unparalleled in functionality but is not user friendly will ultimately fail.
Many of these ESG software programs will allow users to select frameworks such as the Sustainability Accounting Standards Board (SASB) or Global Reporting Initiative (GRI) to create a disclosure following that framework’s specifications. The flexibility of the software is essential for ESG companies to streamline the reporting process.
In addition to flexibility, ESG software solves the data management problem and allows for the proper monitoring of environmental goals. Other software programs, such as carbon accounting tools, are implemented by building professionals to gather data and select materials that reduce overall carbon emissions.
Stay tuned for our next ESG blog that emphasizes the importance of reducing embodied carbon to reach a net zero economy.