Tag Archives: ESG Data Providers

As demands for sustainability are observing a surge, financial services firms are no exception as contributors. While not being a direct point of contact with the damage, these firms still contribute a fair share of harm via their investment and lending practices. Like many asset managers, banks, and insurance companies, fund projects that involve deforestation, fossil fuel projects, and other high emission producing projects that indirectly contribute to the climate change. The “Banking on Climate Chaos 2024” report indicates that the world’s 60 largest private banks have financed about $6.9 trillion in fossil fuels since the 2016 Paris Agreement, with $705 billion spent in 2023 alone. Significantly, close to half of the total, or $3.3 trillion, has gone toward fossil fuel growth projects. The data given make ESG investing equally important for the financial sector in contrast with the non-financial sector.

In the financial world, ESG investing reduces the risk of financing destructive industries and increases long-term stability, whereas in the non-financial world, it promotes operational sustainability and ethical business practices.

ESG Investing in Financial Services

ESG Investing in Financial Services

A recent report by Morgan Stanley revealed that sustainable funds outperformed traditional funds in the market. As per the report, AUM for sustainable funds grew to $3.5 trillion as of June 2024, 3.9% above year-end 2023 and 7.7% higher year-over-year, a record high. This is 7.0% of the total. Globally, AUM is a bit lower at 7.2% to end 2023 and 7.3% at 1H2023, predominantly evidencing stronger inflows into the Classic fund universe.

Even after having multiple bodies for regulation, the embedding of sustainability within key financial decision-making continues to be uneven, with calls for more robust regulatory regimes and improved climate-related disclosure transparency.

Risk Mitigation and Long-Term Value Creation Through ESG Integration

Identifying and Mitigating Financial and Operational Risks

The incorporation of ESG investing enables firms to detect and reduce various financial and operational risks that consume long-term value.

Environmental risks, such as climate change and resource depletion, subject firms to regulatory sanctions, supply chain disruptions, and asset devaluation. According to an S&P Global report, firms with high emissions and weak environmental practices experienced 15-20% higher volatility during market downturns.

Social risks, such as poor labor practices and weak diversity policies, result in reputational loss, legal liabilities, and talent attrition. Backed by the Harvard Business Review, companies with poor diversity and inclusion face 25% more reputational crises.

Governance risk, in the form of unethical management or poor oversight, heightens the risk of fraud, regulatory sanctions, and shareholder unrest. A World Bank report revealed that companies with weak governance practices have a higher likelihood of corporate fraud, which can lead to a 10-15% drop in the share price.

Organizations that actively manage such risks via robust ESG investing do not just insulate themselves from unexpected interruption but also become resilient, promoting stakeholder confidence and business stability in the long term. Research by MSCI during the COVID-19 pandemic revealed that ESG-based portfolios performed 5.6% better than the overall market in Q1 2020, proving the risk-buffering impact of ESG integration during times of crisis.

Enhancing Long-Term Value and Shareholder Returns

Beyond mitigating the risk, ESG also drives long-term financial performance and shareholder value. Research consistently indicates that firms with robust ESG practices outperform others by optimizing operational efficiency, improving stakeholder relations, and driving innovation.

ESG Investing: Maximizing Shareholder Returns

ESG Investing: Maximizing Shareholder Returns

Sustainability-focused firms tend to have competitive benefits, like lower regulatory risks, enhanced brand reputation, and access to new markets. In times of market uncertainty, firms with strong ESG investing exhibit higher resilience, as they are more equipped to deal with crises and respond to changing circumstances.

In addition, ESG-focused firms are more likely to attract long-term institutional investors looking for sustainable returns, enhancing their risk profile and decreasing the cost of capital.

Case Study

Unilever’s Sustainable Living Plan (USLP) in 2010 embedded sustainability into the heart of Unilever’s business strategy through efforts to lower the environmental footprint, enhance health and well-being, and improve livelihoods. USLP had by 2024 contributed 75% of the growth of Unilever, with brands from the USLP portfolio, like Dove and Hellmann’s, growing much more rapidly than other brands. This approach not only enhanced business efficiency and lowered costs but also raised brand loyalty and consumer confidence. Unilever’s success shows how integrating business strategy with sustainability principles and the right ESG investing can drive long-term profitability and provide superior shareholder returns.

Future-Proofing Business Models

As customers increasingly insist on sustainable goods and responsible business practices, companies that focus on environmental and social responsibility establish deeper brand loyalty and gain long-term market share. To support ESG investing, the PwC Global Consumer Insights Survey (2023) revealed that 76% of consumers are willing to switch brands to support companies that demonstrate sustainability and ethical practices, and 55% of global consumers say they are willing to pay up to 10% more for sustainable products.

In addition, investing in ESG-led innovation unlocks new business models and income streams. Sustainable products, expanding 2.7x more quickly than traditional ones, are anticipated to power a $420 billion market by 2025 (Statista, 2024). Circular economy patterns might produce $4.5 trillion by 2030, while investments in renewable energy broke through $1.7 trillion in 2023 (Bloomberg NEF, 2024). ESG-based subscription services had 23% increased retention and 15% increased revenue growth, while impact-based financial products were growing 35% each year (McKinsey, 2024).

Case Study

In 2024, Tesla continued to be a dominant force in the electric vehicle (EV) market by delivering 1.79 million EVs, just ahead of BYD, which delivered 1.76 million EVs. Tesla’s market capitalization was around $1.4 trillion, indicating sustained investor faith in its sustainable business model and growth through innovation. The worldwide EV market saw substantial growth, expanding by 25% and reaching 17.1 million units sold in the year. However, competition in the EV sector grew fierce, with BYD deepening its international footprint and planning for aggressive overseas expansion. This changing environment underscores the necessity for Tesla to continue its emphasis on ESG investing, technological innovation, and operational excellence to hold its competitive advantage and long-term market leadership position.

ESG investing is moving beyond past exclusionary screening towards impact investing, in which investors are actively pursuing quantifiable environmental and social impacts. There is increasing focus on climate resilience and net-zero targets, with investment in nature-based solutions and climate-resilient infrastructure projected to reach more than $1.5 trillion by 2025.

Sustainability-linked loans and bonds, which totaled over $1 trillion in issuance by 2023, are picking up speed with performance-driven incentives. Regulatory authorities such as the SEC and EU Taxonomy are insisting on tighter ESG disclosures, whilst forthcoming ISSB standards will encourage worldwide consistency and lower risks of greenwashing.

Technological Advancements

Artificial intelligence (AI) and big data are improving ESG analytics by enabling real-time risk identification, whilst the Taskforce on Nature-related Financial Disclosures (TNFD) is encouraging investor attention to biodiversity and natural capital. Moreover, diversity, equity, and inclusion (DEI) initiatives are attracting substantial investment, with more than $250 billion planned for deployment by 2025, acting as a major step towards ESG investing.

Clean energy innovation, and in particular green hydrogen, is also a high-growth space becoming a $200 billion market by 2030. Retail investor engagement is also growing through the availability of fractional investment and ESG-themed robo-advisors, further opening up sustainable investing. Finally, the shift towards the circular economy is also tapping into potential economic value worth $4.5 trillion by 2030, fueling waste reduction and sustainable business, and marching the world towards a better way of living via ESG investing.

 

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

Magistral stands out by combining deep financial expertise with customized solutions, ensuring faster turnaround times and cost savings of up to 40% for clients.

Magistral leverages advanced data analytics, automated tracking, and cross-referencing of multiple data sources to ensure high-quality, reliable ESG data.

Magistral offers flexible engagement models, including project-based, retainer, and full-time dedicated analyst models, catering to diverse client needs.

ESG investing is one of the fastest-growing trends in the investment world. Asset Managers are moving towards ESG investing at a great pace, not only due to regulatory compliance requirements but also because ESG investing has been proven to show better returns and alpha in the past.

What is ESG investing?

ESG stands for Environmental, Social, and Governance and ESG investing relates to evaluating these parameters while analyzing a potential investment.

ESG which was a niche investing technique only a few years back is now the centerpiece of the majority of the investments being evaluated globally. ESG investing trend has seen a massive uptick. The global market for ESG touched $30.7 trillion in 2018 representing a growth of 34% over 2016. It is expected to touch $35 trillion by 2020. The global coronavirus pandemic of 2020 will give further fillip to this trend. Multiple ESG funds, that specialize in ESG based investments is a common theme now

Why is ESG investing important?

ESG specifically touches on some aspects of investments, that are proven to generate superior returns in the past. Investments that are evaluated properly on ESG metrics are more resilient to inherent business risks. ESG investment performance has been better than other investments. Even ESG ETF has shown better performance compared to peers.

ESG of course is the only sustainable way of investing to ensure that the planet we live on, is not distorted and polluted beyond repair and probably the only strategy that could guarantee a really long term performance

Here is a typical example of how ESG could play a vital role in assessing the reliability of the ESG investment in companies

Environmental Factors

Here the relevant factors are resource use, emissions, environmental opportunities, pollution, waste, green supply chain, carbon footprints, and everything else touching the environmental aspects that a given industry, or a company operates in. If a firm is on the wrong side of the environmental side, there could be an enhanced risk of running into bans and penalties, all of which poses a long-term bottom-line impact.

Social Factors

Here the factors relate to society, people, and the workforce in general. The relevant factors here would be Workforce, Social Opportunities, Data Privacy, and Product Responsibility. Social factors are the most important factor for any people-based business. If the “people” part of the business is taken care of, it’s imperative that investments would generate desirable returns in the future, because “people” forms the most important lever for the business profitability

Governance Factors

Governance includes factors like Risk Responsibility, shareholder rights, and CSR initiatives. It is the ability of the management to discharge its fiduciary responsibilities towards the investors. History is full of examples like Enron where Governance made the difference between success and failure. Governance is at the heart of trusting the financial performance and documents related to an investment.

Hence it’s evident that ESG investment for funds like Hedge Funds, Private Equity, Venture Capital Mutual Funds, and ESG Bonds may lead to superior alpha

So, ESG aspects need to be analyzed in detail before making an investment decision.

ESG across the investment value chain

ESG analysis framework for investments for asset management plays its role across the full value chain of investing. Here is how ESG aspects need to be analyzed across the investing value chain so that ESG risk is minimized

ESG across investment value chain

ESG across the investment value chain of companies

Deal Origination

ESG has to play a significant role in the deal origination stage itself. All the deals that are in the pipeline need to go through a quick and dirty assessment of ESG. Here the key is to have the relative comparison across opportunities and still not diving too deep into the evaluation. Also, care needs to be taken to identify the investments that have painted themselves as ESG investments, without following the principals in essence.

Due Diligence

At the stage of Due diligence, the quick and dirty analysis changes into a detailed one. Here the second level of data is collected. Also involved in the process are ESG specialists, data and reporting specialists, and the business experts to have a holistic view of the ESG preparedness of the investment. Also during Deal execution, while arriving at the valuation of the opportunity, the analyst needs to assign the relevant weights to the ESG related red flags and advantages. A benchmark with available ESG standards from ESG rating agencies is performed. A detailed ESG questionnaire is also prepared for the due diligence.

Portfolio Management

ESG plays out even after the investment decision. The portfolio needs to be continually monitored for ESG related red flags, violations, and the efforts made and required in the ESG direction. A centralized Project Management Office for ESG efforts of all portfolio companies goes a long way in establishing common standards across all portfolio companies. ESG policy compliance and ESG disclosure norms are also monitored and managed.

Reporting and Compliance

ESG reporting and compliance standards are still evolving. Europe particularly has taken a lead in ESG compliance over the US and APAC. It’s a matter of time that other geographies also catch up. Even Europe’s standards are not detailed to the second and the third level. This is expected to change in the future. Standards like GRI, SASB, TCFD, and several others across geographies need expert intervention for compliance.

Challenges related to ESG data collection

There are multiple challenges related to the data collection process when it comes to ESG. Here are the major challenges

ESG Data Challenges

ESG Data Challenges and Solutions

 

 

 

 

 

 

 

Data is not scalable: Due to the patchy nature of data available across the investment avenues, there are limited options for streamlining and scaling up the data operations.

Customized Data Requirements: Every Asset Manager has a different ESG mandate and there is no one size fits all approach to data collection. Every data collection exercise needs to be customized to effectively capture information that serves the investment mandate

Voluntary reporting: Though compliance standards are evolving, still most data reporting is voluntary. This presents challenges in evaluating and comparing data points across investment avenues.

Incomplete Data: Data many a time is incomplete and there is a huge dependency on proxy information to complete the picture

Incomparable formats: The available data are spread across geographies and varying reporting standards. It presents challenges in comparing the data points across multiple investment options

Lack of reliable sources: There are some sources for ESG data and ESG index but there is none that is fully reliable. Hence there is a need to depend on multiple sources to complete the picture of ESG evaluation

A solution to the Challenges

Magistral Consulting offers a full suite of data services when it comes to ESG data collection, treatment, and presentation. Magistral relies on ESG experts along with data research and visualization experts to present a holistic picture. AI and automation tools further reduce the cost of data collection. All the solutions are customized as per the needs of Asset Managers so that the solution helps the Asset Manager in achieving a superior alpha. ESG research is performed by experienced ESG analysts

The unique advantages of Magistral’s solutions are ESG operations cost reduction, and the panel of experts on ESG, SME, ESG consultants, and Investment Research

Magistral’s ESG Services Framework

Magistral follows a customizable plan to offer ESG data services.

ESG Framework

Magistral’s proprietary framework for ESG evaluations

 

 

 

 

 

 

 

Here are the major aspects of the framework:

Data Collection: The key is to access as many data sources as possible about the ESG stock. Even when the complete data is not available, opinions, insights, and experts’ views help. ESG investing criteria is crystallized

Alignment with the mandate: Although a wide array of ESG data is collected but not all data points may be relevant for the ESG investing for the Asset Manager. In this stage, data is aligned with the investment objective, investment philosophy, or the investment mandate. This is where the views of Asset Managers are built into the process. ESG investing strategies of the Asset Manager is also built-in.

Modeling: All customizable aspects are built into the model so that investment avenues could be objectively compared and evaluated. ESG ratings or ESG score are arrived at, in this stage

Reporting: Reporting could be done through customized tools like web-based distribution, excel models, or cloud sharing tools. Effective visualization for ESG metrics is incorporated to pass on the right messages.

Magistral Consulting has helped Hedge Funds, Bonds, Private Equity, Investment Banks, Mutual Funds, ETFs, and Venture Capital in analyzing ESG aspects of investments across the globe

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.