ESG Data: A Rapidly Increasing Market

In response to surging demand from financial institutions, ESG (Environmental, Social, and Governance) data markets are undergoing rapid transformation. These changes are significantly reshaping the landscape of ESG data usage within the financial sector.

Market Evolution to Meet Demand

The ESG data market is in a state of evolution, driven by the escalating requirements of financial institutions, their investors, and regulatory bodies. While major vendors have traditionally dominated this market, there is now a rising presence of specialized data providers catering to specific niche demands within the financial sector.

Scale, Growth, and Maturity

ESG data markets are expanding both in scale and maturity, reflecting increased day-to-day utilization by virtually all financial institutions. In 2021, ESG data providers reported revenues exceeding $1 billion, with a potential increase to $1.3 billion in 2022, growth that has surpassed the market’s status just two years prior.

Driving Factors: Investor Demand and Regulation

Investor demand stands as a pivotal driver. Financial institutions with robust ESG offerings are gaining a competitive edge, and this demand is further bolstered by regulatory initiatives that actively shape the ESG data landscape. More institutions fall under mandatory European disclosure rules (including the EBA ESG risk management guidelines for banks), and emerging regulations in the US and Asia are poised to stimulate demand in those regions. Asset managers lead ESG data expenditure, making up 59% of all buyers, followed by insurers and other institutional investors.

Geographical Dominance

Europe’s ESG data markets take the lead globally, with European organizations accounting for 60% of global spending on ESG data. However, other regions are catching up. The US has witnessed a significant shift in attitudes toward sustainability since 2020, resulting in growth in ESG data providers. The Asia-Pacific region has also experienced an uptick, albeit typically not as comprehensive as in Europe. ESG data markets in the Middle East and Latin America remain relatively small.

Market Structure and Players

ESG data markets are marked by a hierarchical structure. A handful of major vendors dominate, followed by a second tier of competitors and a long tail of specialized providers. Emerging niche operators often aim to address specific data coverage gaps but frequently find themselves acquired by larger incumbents seeking comprehensive solutions. If this trend continues, it is likely to shorten the market’s long tail as the industry matures.

Technology-Related Barriers

Leading data providers maintain their positions largely due to significant technology-related barriers that hinder switching. While users may make minor adjustments to their data suppliers, wholesale changes pose considerable challenges. Large asset managers, for instance, require over a year to switch between core suppliers due to the complexities of integrating multiple data types into core technology systems.

Expanding Data Coverage

ESG data vendors continue to broaden coverage across various asset classes. Public markets, sovereign instruments, and listed real estate are witnessing substantial growth. Private markets are also expanding, although limited data availability for SMEs results in concentration on larger unlisted companies. Beyond climate, ESG data coverage now encompasses social priorities and emerging categories like biodiversity.

Challenges in Data Quality

Despite increased availability, quality remains a concern. Scope 3 emissions data faces particular limitations due to shortcomings in underlying disclosures, forcing providers to rely heavily on interpretation and proxy metrics. Inconsistencies across providers can be stark, with different vendors assigning vastly different ratings to the same companies, posing real challenges for investment decisions.

Growing Costs and Risks for Users

Users face increasing costs and risks due to data quality issues. Many financial institutions find it challenging to rely on a single provider, leading to a blended approach involving multiple vendors. This not only duplicates external costs but also requires additional in-house spending to analyze, compare, and curate ESG data. Consequently, many larger users have established their own ratings teams, creating proprietary scores drawn from various third-party sources.

Regulatory Appetite

The lack of consistency, standardization, and independent assurance in ESG data markets is a growing concern. Regulatory bodies are showing interest in regulating leading data vendors. Initiatives such as a European Commission consultation on ESG ratings aim to assess potential interventions in the market.

Strategic Data Management

In response to these challenges, strategic data management practices are gaining traction. Integrating ESG data into enterprise-wide strategies can enhance efficiency, reduce costs, and facilitate effective governance. Key focus areas include migrating to a single data layer supporting all ESG use cases, utilizing a data model that integrates key ESG frameworks to rationalize external data sources, and embedding an ESG data governance operating model that provides a holistic view of priority initiatives.

Looking Ahead

ESG data markets remain dynamic, with data coverage and categories advancing rapidly. Collaboration on industry platforms and regulatory initiatives, such as the European Single Access Point (ESAP), are expected to enhance data availability, quality, and accessibility. As regulations like SFDR and CSRD take full effect, the availability and quality of reported data should further improve.

Frequently Asked Questions

How large is the ESG data market?

ESG data providers reported revenues exceeding $1 billion in 2021, with estimates reaching $1.3 billion by 2022. The market continues to grow as regulatory mandates expand globally and more financial institutions embed ESG analysis into their investment processes. Asset managers account for 59% of ESG data spending, followed by insurers and institutional investors.

Why do ESG ratings differ between providers?

Different ESG data vendors use varying methodologies, data sources, weighting schemes, and materiality frameworks. This can produce significantly different ratings for the same company, a well-documented problem in the industry. Many institutional investors address this by blending data from multiple providers and building proprietary scoring models on top.

What is the European Single Access Point (ESAP)?

ESAP is an EU initiative to create a centralized digital platform where corporate financial and sustainability disclosures are publicly accessible in machine-readable format. When operational, it is expected to significantly improve ESG data accessibility, comparability, and reduce the cost of data acquisition for investors and regulators across Europe.

How can financial institutions manage ESG data costs?

Key strategies include migrating to a single unified data layer that supports all ESG use cases, adopting a data model that integrates major ESG frameworks (CSRD, SFDR, EU Taxonomy) to rationalize overlapping data requirements, and working with specialized providers like Cleartraced that deliver traceable, source-linked data rather than opaque ratings, reducing the need for expensive in-house verification teams.