Generation IM predicts data revolution amid concerns

A new report on ESG data looks at the shortcomings of existing information sets

A leading investment firm founded by climate change visionary Al Gore has launched a ground breaking report beckoning a revolution in the ESG data underpinning the trillion-dollar sustainable investment industry.

London-based Generation Investment Management, established in 2004 by former US Vice President Al Gore and ex-Goldman Sachs’ asset management head David Blood, has published its timely report, ‘The future of ESG data’, amid growing concerns about the current state of ESG data –  which has often been criticised by investors for being inconsistent, inaccurate and retrospective.

“The reality is that coverage remains patchy. Data is only currently available for some metrics, for some firms in some geographies. Indicators for social issues are relatively weak, at a time when societal challenges have never been higher on the agenda,” the report warns.

The paper highlights an over-reliance on certain metrics such as greenhouse gas emissions to evaluate a company’s sustainability profile. Current data also often focuses on the worst performing firms rather than helping investors to identify positive opportunities for sustainable investment, according to the report.

Calling for a radical overhaul of ESG data, the investment firm said the industry must move towards forward-looking disclosure rather than snapshots, as well as assessing what companies do – not just how they behave.

“ESG data is currently much better at telling us how a business operates, rather than about what it does. By ‘what’, we mean that companies produce goods and services aligned with the society we want. By ‘how’, we mean that companies conduct their business in a long term, responsible way, with regard to all stakeholders,” the paper explained.

According to the report, the next generation of ESG data will be driven by five key enablers.

These include AI and machine learning, which canbe trained to identify the most material ESG factors for a company and then serve them up to an analyst or ESG index. This will help bridge the gap between the rich, contextual insight in individual indicators and the need to ‘plug something into the spreadsheet’, Generation Investment stated.

Remote sensing and satellite imagery will also play a major role. For example, one NGO Carbon Tracker is using satellite imagery to assess fossil fuel plants around the world with 90% accuracy, enabling a step change in the quality of emissions calculations, the report suggests.

Other key enablers include third-party verification delivered via new technology such as blockchain, increased disaggregation of accounts that provide separate ESG scores for a firm’s different operations, and more open access to ESG data to enable non-profit organizations and governments to scrutinize companies and investors.

“Investors ignore the limitations of ESG data at their own peril,” Felix Preston, director at Generation Investment Management and the report’s author, said. “We need data on how well companies are doing compared to their public statements. Investors need sustainability targets to be as clear as targets for financial management. To achieve that, we need a revolution in data.

“We won’t solve this issue overnight – it will take active collaboration with multiple stakeholders, including data providers, investors, policy makers and non-governmental organizations. We look forward to partnering with others to build the next generation of analytical tools that will appropriately underpin the fast-evolving landscape of sustainable investment,” Preston added.

The report follows a long line of ESG initiatives by Generation Investment.

Not long after its launch the company established the Enhanced Analytics Initiative to support sell-side research into long-term sustainability risks and opportunities.

In 2013, the firm, which has $23bn of assets under management, also provided seed funding to influential US non-profit group the Sustainability Accounting Standards Board (SASB), which has led the charge in establishing ESG disclosure standards across the sector.