Why Companies’ ESG Data Will Be in High Demand
The coming necessity of ESG reporting compliance (environmental, social, and governance) is expanding in many parts of the economy. The change is driven by increased shareholder interest, as well as government policies that are intended to mitigate the risks of climate change. Forbes reports that a quarter of U.S. investments are now in ESG companies, accounting for $12 trillion dollars.
However, as ESG becomes more mainstream, companies will face increasing pressure to standardize their data so that regulators and stakeholders can analyze and compare it more easily. Both the reporting requirements and types of demanded datasets have not been decided upon yet, much less standardized.
According to Bloomberg, “the lack of consistent reporting standards for ESG data presents a major barrier to the increased adoption of sustainable investing.”
This post will take a look at the reasons why the demand for ESG data is increasing – and what financial institutions can do to prepare for this shift.
What is ESG Data?
ESG data are the measurements and metrics of a business or organization’s impacts on environmental, social, and governance matters. This data will aggregate to fit into a reporting structure determined by regulatory bodies. While the exact reporting frameworks are not fully-fledged yet, one thing is certain: businesses will need a way to gather and measure ESG data.
According to Investopedia, “Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals,” as well as potential environmental risks.
Data that measures social impact may cover a company’s relationships with other businesses and with the wider community. This could include factors such as whether or not its partners adhere to a certain set of values or standards, how it treats its employees, and more.
Soon, businesses such as agricultural finance institutions will be required to report ESG data. In the U.S., the Securities and Exchange Commission (SEC) has appointed an advisor on ESG initiatives, while in Europe, the Sustainable Financial Disclosure Regulation (SFDR) requires “financial market participants and financial advisors” to make certain disclosures beginning in the second quarter of 2021.
Why the Demand for ESG Data is Increasing
The driving force behind the demand for ESG data is a growing concern over climate risk and whether or not the business and financial sectors are prepared to address it (and/or mitigate potential losses).
A report by Ceres argues that a lack of action would “present clear systemic risks to U.S. financial markets…. These risks could have significant, disruptive consequences on asset valuations, global financial markets, and global economic stability.”
Although ESG initiatives may focus on social and natural capital, they can also play a major role in protecting financial capital as well. The datasets that will need to be collected are useful and are important for more than just meeting reporting requirements.
Businesses can use ESG data to assess a wide range of sustainability issues, such as water scarcity in agricultural finance, that could have an impact on the overall risk of their portfolios. More transparency and availability of ESG data will allow stakeholders to make better decisions that take the well-being of natural resources into account ensure long-term returns on their investments.
ESG reporting is fairly new terrain, especially in the United States. This causes a more-or-less collective loss in terms of plans of action. BNP Paribas reports that “for many small and medium-sized companies, such disclosures are complicated to make.” And the Fitch Ratings agency found that “banks’ ability to carry out climate change-related stress tests could be vastly improved by standardization of corporate ESG risk disclosures.”
While financial institutions are increasingly drawn to impact investing, the lack of standardized data is getting in the way. Bloomberg argues that investors “prefer raw ESG data to ESG scores because it allows them to customize the data sets for their needs” and that the current situation is “slowing down experienced investors and inhibiting new entrants from joining the field.”
Ultimately, businesses and financial institutions that can provide clear and transparent ESG data may be more attractive to lenders and investors and will be better prepared to comply with government regulations and pressure from stakeholders to meet ESG goals.
The Implications for Financial Institutions
Although ESG reporting requirements are still in development and may be rolled out differently across regions, industries, etc. – again, the exact format of ESG reporting is still unclear – financial institutions can plan ahead to ensure that they have the resources they need to provide actionable ESG data when required.
PricewaterhouseCoopers identifies “six key challenges for financial institutions to deal with ESG risks,” which includes collecting and managing ESG data and communicating with stakeholders about ESG commitments.
Institutions will need to consider which of the available reporting frameworks to use, how often to report ESG data, and how to ensure that it’s interpreted correctly by regulators, stakeholders, and the general public.
This will be especially important in industries that have a close link to the environment and natural resources, such as agriculture. Agricultural banks that fall behind the curve on ESG reporting may find themselves at risk of financial loss and reputational damage.
As S&P Global points out, “Many companies appear to have come to the conclusion that they will need to adopt new and less damaging agricultural practices for future success.”
When used effectively, ESG data can play a role in this transition. It can help to inform risk mitigation guidelines, identify and monitor the connections between different types of risk, and ensure the sustainability of loan and investment portfolios.
Knowing how to work with ESG data will help financial institutions protect all three types of capital – social, natural, and financial – and be less vulnerable to financial risk.
Learn more about ESG reporting and capital risk in the AQUAOSO Guide.
The Bottom Line
Shifts in normalities are occurring:
- As investors and governments alike focus on sustainability, private sector companies will face increasing pressure to report accurate and transparent ESG data.
- In addition, financial institutions will encounter regulatory requirements to report their ESG data and demonstrate their resilience in the face of climate change and other risks.
- Finally, investors may find themselves moving away from third-party ESG scores in favor of standardized reporting metrics that they can analyze themselves.
Taken together, these shifts mean that agricultural banks, lenders, and other industry professionals will need to make sure they have access to ESG reporting tools and metrics and plans to utilize them.
AQUAOSO’s Water Security Platform is a tool that ag professionals can use to identify and monitor water risk as part of their ESG initiatives. From real-time data on water rights to related issues such as groundwater management, SGMA, and smart water markets, AQUAOSO helps ag banks, lenders, and other ag professionals see how water security fits into the health of their portfolios.
Reach out directly to learn more about what AQUAOSO can do, or browse the resource page to explore related water security topics in more depth.
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