As investors and policymakers demand greater transparency on companies’ environmental, social and governance credentials, a small army of start-ups is taking on the data challenge – though some wonder if this is helping or hindering matters.
Two years ago, Larry Fink, CEO of the world’s biggest asset manager, BlackRock, first warned that “climate risk is investment risk”, stressing the importance of both data and disclosure in managing this risk.
Today, there is no shortage of data providers looking at environmental, social and governance (ESG) factors, with established names such as S&P Global and Moody’s as well as new start-ups all providing data related to ESG profiling or climate risk.
With the introduction of new sustainability regulations in the UK and the EU this year, appetite for ESG data among investors, asset managers and companies has increased. According to a report by German venture capital firm CommerzVentures, climate fintech companies focused on carbon accounting, climate risk management and ESG reporting raised a combined total of $902mn in 2021.
Plenty of data
Josh Gilbert, CEO of ESG data start-up Sust Global, says “there’s a lot of new ESG providers appearing to capture short-term opportunities as the market scrambles to meet regulatory requirements” but that often this data “is inconsistent” and “methodologically flawed”. He expects, however, that as the market develops, new technologies – such as satellite data, deep learning and artificial intelligence – will “drive a shift towards ESG data validation and ease of integration into workflows”.
The EU’s Sustainable Finance Disclosure Regulation, which came into effect in March last year, lays out mandatory ESG disclosure obligations for asset managers and thereby underscores the need for reliable data, which would be needed in reporting.
RiskThinking.AI founder Ron Dembo says ESG data analysis ranges from telling companies they need a more diverse workforce to rigorous modelling of the financial risks of climate change – “the absolute mundane to the exotic” – but he stresses the importance of climate risk to companies’ future.
RiskThinking.AI, says Dembo, models the economics and climate of any given region dating from 1850 on, as well as looking at corporate disclosures and company supply chains. “Climate risk is different from regular financial risk in two ways,” Dembo says. “It’s asset dependent and it’s location dependent. If a business has a factory in Bangalore and another in Pittsburgh, their financial risk might be the same but their climate financial risk would be different, and you have to model that.”
Buying start-ups
To boost their data offerings, the incumbent data providers, such as S&P Global and Moody’s, have been buying up new start-ups and incorporating them into their businesses. This year, S&P Global bought the Climate Service, a company based in North Carolina and founded in 2017, which has a tool that quantifies climate risk in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It models physical risk, including extreme weather conditions, and provides information on transition risks including changing legal, regulatory and market conditions.
Manjit Jus, global head of ESG research at S&P Global Sustainable1, the group’s sustainability intelligence arm, says that with recent acquisitions, its “ESG capabilities have been growing steadily over the past few years”. For scope 3 emissions, S&P Global relies on modelling techniques, such as those done by TruCost, an environmental data provider and climate analytics company the firm acquired in 2016.
“ESG is growing fast and moving fast. While there may be more and more data, our clients want more data that goes deeper. I think there’s a race on both ends and that is certainly the challenge for us all,” Jus says. He predicts that with the standardisation of TCFD and other regulations, there will likely be more information, more harmonisation and more accessibility to data.
Some asset managers, meanwhile, need greater convincing with regard to start-ups. Eoin Fahy, head of responsible investing at KBI Global Investors, says there has been an “explosion” of ESG data providers. The sheer volume that come into his inbox makes it difficult to manage but he is not yet convinced there is either a problem to solve or a gap in the market. “A new ESG data start-up has to persuade me how they, with limited resources, can compete with the incumbents,” he says.
But at ESG data start-up Plan A, co-founder and CEO Lubomila Jordanova rejects the idea that the established data providers are in opposition with the newcomers. She says the data industry cannot exist in silos and that knowledge sharing is an integral part of it, and this in turn has led to more mergers and acquisitions.
“What is one of the most shocking elements about our industry is that there’s already been consolidation and it’s not that old. The majority of companies came in the last 12 to 24 months, when normally this consolidation happens within the first five years,” she says.
Founded in 2017, Plan A is a software-as-a-service company with tools for carbon accounting, decarbonisation and ESG management, which counts over 600 companies on its books. It has raised $15mn to date and cites SoftBank as a strategic investor. Jordanova says her company has been approached several times to be acquired but it is not her intention to sell.
New thinking needed
Maria Morais, the co-founder of sustainability accelerator Circklo, anticipates increased consolidation in the sector, where the big players can provide the scale and the smaller players can provide the speciality. But RiskThinking.AI’s Dembo believes scale can be achieved by his company without being acquired.
“Our goal is not to be acquired. We need big distribution networks and big partners with large networks and together we can reach scale very quickly,” says Dembo. In 2021, RiskThinking.AI announced its partnership with US bank BNY Mellon, through which it provides risk information to 40 per cent of the world’s listed assets under management, he says.
If ESG data incorporates a range of disclosures, physical assets and environmental risk, as well as a range of methodologies and technologies, the complexity of the issue at hand could drive a more holistic approach, necessitating fresh ideas.
Dembo recalls when banks were compelled to calculate full enterprise risk for the first time about two decades ago in the wake of the Basel II accord and their need for new solutions. “That was a big transformation – and that’s what is going to happen in ESG,” he says. “It’s a sophisticated issue and it’s not going to be solved by data that you were collecting in the first place.”