By Amir Nosrat, ESG Consultant at Millani
There are two clear observations at the intersection of ESG and data – first, the rise of sustainable finance is accelerating demand for ESG data. Second, providing and accessing useful ESG data is a persistent pain point for corporates and investors alike.
In particular, financial actors desire harmony – or consistent, comparable, and transparent metrics from their corporate partners. We at Millani have also observed that many investors do not only want quantitative data, but qualitative context as well to help ground in their analysis. However, Canadian issuers, like their global counterparts, are challenged with providing the information that investors are seeking because expectations are heterogenous and constantly evolving – an apt analogy could be a football match with moving goalposts, changing rules, and refereeing by the audience.
There hasn't been any shortage of framework setters who have attempted or are attempting to tackle this very problem (GRI, CDP, TCFD, SASB, IFRS, etc.). Yet, delivering harmony remains elusive, even for ESG data aggregators. In a 2020 report published by MIT comparing ESG ratings of major rating agencies (Sustainalytics, RobecoSAM, Vigeo Eiris, Asset4, KLD, and MSCI), overall ESG ratings of corporate issuers can diverge substantially, despite relying on similar, if not identical, data sources.
On the one hand, passive index funds are increasingly reliant on these ESG rating agencies to determine their portfolio constituents – leaving issuer access to capital at the mercy of selection and weighting methodologies of rating agencies. On the other hand, active fund managers, driven by limited transparency and high costs of data rating agencies, are moving towards developing their own in-house ESG rating assessments, which is expected to further fragment the ESG rating landscape.
In short, harmonization has proved to be a challenge across the global stage.
This leads us to the question: If the Canadian market values harmony, can emerging and complementary approaches help ease pain points across the Canadian ESG data supply chain?
The Expert Panel in Sustainable Finance may have provided a template to tackle the data challenge beyond standard-setting and ratings. Under Recommendation 4 of their final report, the panel found that access to reliable and consistent climate data was hindered by fragmented data storage locations, data formats, and costs. They proposed that the Canadian Centre for Climate Information and Analytics (C3IA) be designed as a multi-stakeholder ‘hub and spoke’ platform to synthesize climate-related information from Canada’s climate, academic, and financial data centers. Crucially, the function of this platform would be to develop and maintain a one-stop shop for climate data and analysis for investors, corporates, and insurance providers.
While the scope of the Expert Panel report has been on physical climate risks, Canadian issuers and their financial stakeholders could benefit from a similar ‘hub and spoke’ platform focused on other ESG topics by gathering and producing “complete, authoritative, decision-useful and interoperable” data and “practical… financial, economic, and corporate analysis”.
There are international initiatives that Canada can also draw from. The World Bank provides a data platform for ESG analysis of national sovereigns, while the United Nations maintains an open data hub on the progress of national sovereigns on meeting Sustainable Development Goals, for use by decision-makers in need of “accurate, timely, sufficiently disaggregated, relevant, accessible and easy to use” data and statistics.
The TSX’s recent partnership with a private company to develop an ESG reporting and data distribution repository is also notable. However, data gaps and inconsistencies are most pronounced in Canadian small-cap companies (small and medium enterprises constitute 89% of Canada’s private labour force and 56% of GDP), private equity, and increasingly in debt markets – areas in which the TSX data repository is currently not well equipped to address.
A public ESG data hub of Canadian corporations modeled on a combination of elements of the Expert Panel’s recommendations on physical climate risks, the TSX’s new privately managed ESG data repository, and international ESG data platforms on national sovereigns, could help iron out many of the pain points currently seen throughout the ESG data supply chain. Canadian enterprises, large and small, public and private, would know where to look to for data. ESG data providers would draw from the same sources of information to maintain confidence in their ESG ratings. Investors seeking opportunities in Canada would know where to find consistent, reliable, and relevant ESG data from Canadian issuers.
But as with any complex ecosystem initiative, there will inevitably be thorny questions and trade-offs – how will it be designed, who will develop and maintain the hub, who will pay for it, and who will it be used by?
What’s certain is that a ‘Canadian ESG Data Hub’, if valuable, can’t succeed without the involvement of the Canadian government, financial actors, public issuers, and private enterprises. Convening authorities such as Finance Canada, CPA Canada, the Office of the Superintendents of Financial Institutions and their provincial counterparts charged with the regulation of banks, pension funds, and insurance companies, may be natural focal points for the development and implementation of such an ESG data hub.
Regardless of what unfolds, Millani is closely monitoring challenges and issues at the intersection of ESG and data, and we look forward to updating our community on our most recent findings and insights.