Four Things No One Will Tell You About ESG Data

Abstract

As the ESG finance field and the use of ESG data in investment decision‐making continue to grow, the authors seek to shed light on several important aspects of ESG measurement and data. This article is intended to provide a useful guide for the rapidly rising number of people entering the field. The authors focus on the following: The sheer variety, and inconsistency, of the data and measures, and of how companies report them. Listing more than 20 different ways companies report their employee health and safety data, the authors show how such inconsistencies lead to significantly different results when looking at the same group of companies. ‘Benchmarking,’ or how data providers define companies' peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market‐wide inconsistencies and undermines their reliability. The differences in the imputation methods used by ESG researchers and analysts to deal with vast ‘data gaps’ that span ranges of companies and time periods for different ESG metrics can cause large ‘disagreements’ among the providers, with different gap‐filling approaches leading to big discrepancies. The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for ‘a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.’ What can be done to address these problems with ESG data? Companies should ‘take control of the ESG data narrative’ by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should ‘customize’ their metrics to some extent, while at the same time seeking to self‐regulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.

Do Baltic investors care about environmental, social and governance (ESG)?

“…Also academics have recognised that data inconsistency creates challenges in proper data evaluation. Kotsantonis and Serafeim (2019) in their analysis reviewed a sample of 50 large publicly listed companies and manually collected their disclosures on employee health and safety data. The authors found more than 20 different ways how the sample companies chose to report this metric, implying that such inconsistencies may likely lead to significantly different ESG scores.…”

“…In addition, as very few of the single data points can be analyzed on absolute terms, a selection of a proper peer group to perform the benchmarking exercise is a crucial step in the evaluation. As the vast majority of the ESG ratings are awarded in a relative relation to a peer group, the proper definition and allocation is crucial, however often not explicitly disclosed and therefore might lead to deviations in the actual ESG assessment (Kotsantonis & Serafeim, 2019).…”

Material ESG Outcomes and SDG Externalities: Evaluating the Health Care Sector’s Contribution to the SDGs

“…Researchers have long noted that ESG rating—along related concepts such as socially responsible ratings, sustainable and responsible ratings, responsible investment—and ranking organizations, as well as indices, frequently rate the same corporation’s E, S, and G elements differently (Kerber & Flaherty, 2017). As Chiu (2010) noted in one study regarding company corporate social responsibility (CSR) reports, they are “selective, subjective and not comparable” (see also, Kostantonis & Serafeim, 2019; Pagano et al, 2018; Dorfleitner et al, 2015; Halbritter & Dorfleitner, 2015). In spite of this, ESG factors are seen as increasing central to mainstream investing.…”

ESG and bank regulation

“…However, even if the data themselves are trustworthy, different companies report as many as several dozen completely different -or differently calculated -data points for the same attribute. A typical example is offered by the analysis of Kotsantonis and Serafeim (2019), who found that 50 big Fortune 500 companies use 24 different measures in the category of employee health and safety, while even firms that use the same measures do not necessarily define nominally identical measures in the same way.…”