Background and market development

Sustainable investing has experienced substantial global growth in the past decade, with expectations of further expansion as it becomes integral to asset management. This surge aligns with an increasing demand for high-quality sustainability-related data, ratings, and research, crucial for various aspects of the investment process. The European Union (EU) market stands out as mature, having embraced sustainable investing for at least two decades.

Current market landscape

The report dissects sustainability-related rating systems, methodologies, and data providers, highlighting the diversity in interpreting Environmental, Social, and Governance (ESG) issues. Providers differ in their approach to ESG, offering both comprehensive and specific offerings within product categories. Fee structures vary, often through subscriptions, with some using a license unit fee for individual company ratings. ESG ratings provision lacks EU regulation, although some providers are regulated for other business activities.

ESG data usage

Asset managers are the primary users of ESG data, integrating it into various facets of asset management. Sell-side institutions, asset owners, and corporations also employ ESG data. The report suggests that while broad ESG metrics show a weak positive relationship with financial metrics, focusing on specific metrics could strengthen this connection. Evidence points to the predictive power of a smaller set of ‘material’ metrics rather than generic ratings.

Application of ESG data in investment decisions

Presently, asset managers exhibit limited internal capacity for in-house ESG analysis. The report recommends developing this capacity to reduce reliance on third-party providers, enabling asset managers to produce more accurate and decision-useful ESG company analyses.

Sell-side brokers, credit research agencies, and independent research providers

Asset managers value sell-side broker research for its superior sector and company knowledge, alongside financial analytical skills. There’s a demand for integrated research combining ESG and sustainability factors into company analysis and financial forecasts.

Recommendations

The report outlines eight key issue areas hindering market efficiency, offering tailored recommendations for key market participants:

• Asset managers: Develop in-house capacity for ESG company analyses.
• Sell-side brokers, credit research agencies, and independent research providers: Integrate ESG and sustainability factors into company analysis.
• Sustainability-related rating and data providers: Improve transparency and quality, enhance comparability, align criteria with sustainability issues, and focus on material and forward-looking risks.
• Asset owners, managers, benchmark, and data providers: Focus on material issues, provide granular data, identify alternatives to self-disclosed data, and offer insight into associated financial risks for integration into decision-making.
• Issues related to corporate disclosure: Promote greater consistency in ESG data disclosure among companies.

Challenges and conclusions

The report concludes by acknowledging challenges and limitations in the sustainable finance market, citing a lack of transparency, limited disclosure of ESG information, inconsistencies in evaluating sustainability performance, and restricted capacity development for ESG data providers. The proposed recommendations aim to realign the market for sustainability-related products and services, complementing the European Commission’s Sustainable Finance Action Plan.