The new gold: investment strategies risk drowning in unreliable data

An unprecedented amount of investment is required to reduce global greenhouse gas emissions in line with the goals of the Paris Agreement. 

To facilitate this complex investor journey to net zero, a number of investor-backed net zero frameworks and initiatives have been launched in recent years.

Consequently, ESG data providers have flooded investors with datasets, reports and other information. However, these data sets often show very different outcomes, contain different scenarios and risk assessments and, as a result, send investors in different directions.

The maze of information sets also makes stewardship and engagement efforts outright challenging.

Therefore, to make informed investment decisions and engage effectively with their investee companies, asset owners urgently need robust and reliable climate data.

That is the firm warning from René van Merrienboer, director for sustainable systems, at the Principles for Responsible Investment, the United Nations-supported international network of financial institutions that aim to implement six principles, often referenced as "the Principles".

Discussing new PRI research that warns for a ‘gap’ between investors’ needs and available climate data, van Merrienboer said that “these findings shine a light on the gaps that currently exist between investors’ need for high quality climate data and the data currently available.”

Third-party providers

One major issue that complicates a flow of reliable data is that investors often rely on climate data and products from third-party data providers.

As the number of these providers and their products grow, investors and other stakeholders, such as regulators and standard setters, have highlighted the importance of maintaining the quality of these products, given the role that they play in decision-making by investors.

The PRI said asset owners should urgently ask themselves, and their peers, ‘what do they need to know?’

“Specifically, what data is needed by investors to support their commitments to reduce the real-world emissions generated by their investments?”

Van Merrienboer stressed that while the coverage of large companies in developed markets is reasonably good, there are significant gaps in the quality of the data and information being provided.

“In part, this is a function of the quality and availability of the corporate data that underpins these data products.”

He added, however, that “some gaps are attributable to the data products themselves and wider gaps in the marketplace, including the transparency of the products, a lack of common definitions, limited availability of sector and geographic pathways, and poor coverage and reliability of portfolio-level metrics and methodologies.”

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Hard numbers

Van Merrienboer's warning seems to resonate with key data observers within the industry, as they also note that asset owners increasingly demand hard numbers to verify bold net zero claims and climate pledges.

A growing number of investors expect their companies to show more detailed and specific data to back up ESG claims and strategies, said Pat McCarthy, chief revenue officer at Precisely.

Pat McCarthy, chief revenue officer at Precisely, told Net Zero Investor how consistent, accurate, and contextual data will increasingly play a decisive a role in decision-making for the implementation of net zero strategies.

"Shareholders increasingly want to dive deeper and understand how the companies that they’re engaged with support net zero initiatives," he added.

“This pressure will only increase."

Although many companies already have a data infrastructure in place, many find it is not detailed or trustworthy enough to properly report on these initiatives, McCarthy pointed out.

“Companies will find they need to establish a foundation of data integrity to make strategic decisions based on trustworthy net zero data,” he noted.

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Greater convergence

Van Merrienboer said investors and other stakeholders should not underestimate what investors need to know to be able to realize their net zero commitments, and the quality and coverage of existing climate data and actions that should be taken to build an adequate data ecosystem.

He stressed that “going forwards, greater convergence across the sector on common definitions and transition pathways will also be necessary to strengthen the climate data ecosystem.”

Van Merrienboer put forward a number of recommendations that help to explain the disconnect between investors’ needs and what the market currently provides.

“Corporate data underpins the majority of data products that are currently available. As such, improving corporate disclosure is a pre-requisite to improving the coverage and quality of data products,” he said.

Secondly, data providers need to improve coverage, data provider transparency, forward-looking analysis of climate data, and portfolio-level metrics and methodologies.

Thirdly, “wider consensus-building activities are needed to establish common definitions and agreement on sector and geographic pathways,” he concluded.

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