From ESG Clarity:
Start-ups are snapping up market share
Spending on ESG data is on the rise with an annual growth rate of 20%, with start-up firms gaining a third of the ESG data provider market share, research has revealed. A study by Sybille Mueller on behalf of Substantive Research found investment groups are increasing their budgets for ESG data as they seek further detail on company disclosures, ESG integration and ratings agencies. The report entitled How to Combat Greenwashing? Find the Right Data Partner said ESG data is on the rise at an annual growth rate of 20% and forecasted to approach $1bn by the end of 2021. It also projected assets under management (AUM) in ESG are expected to reach $53trn by 2025 – more than a third of the total global AUM.
Mike Carrodus, CEO of Substantive Research, commented: “The ESG data market is evolving at a dizzying rate and it can be tough for the buy-side to stay on top of what’s out there. With concerns over the ‘greenwashing’ of sustainability performance amongst organisations, identifying those ESG data providers who present information with transparent methodologies has never been more important.”
In response, the group has launched an ESG dashboard to help buy-side clients make sense of the rapidly evolving ESG data provider marketplace and find the right providers for their needs. Users will be able to search across 140 ESG data providers and analyse the choices available in one online portal.
Meanwhile, the research also identified several new trends circulating in the ESG data marketplace. First, the number of start-ups – ESG data providers that have existed for one to five years – make up a third of the market supply with many investors looking outside ‘household names’ within the industry. Carrodus added: “As start-ups already make up more than a third of the market, we expect market evolution to further accelerate, as more providers enter the market to fill some of the niche gaps, and incumbents continue to grow and improve their offerings. Transparency in ESG research methodology will be the key to combat greenwashing and monitor sustainability issues accurately.”
Some 24% of the marketplace is considered mid-level – in existence for six to 10 years – and established firms (established 10 years or more earlier) constitute 37% of the market share. More than half of the providers (53%) offer a generalist approach, providing data on the E, S and G sides, while 33% specialise in just one aspect only.
“Covid has pushed social issues to the forefront with topics such as equality, human rights, labour rights, and product safety and quality rapidly emerging,” highlighted Carrodus. “So, although the ‘S’ in ‘ESG’ can be difficult to quantify, we expect the number of providers specialising in ‘S’ to grow from the current low proportion of 5%.”
In terms of methodology, 70% of the providers have developed their own bespoke ESG frameworks but reflect on one or more of 20 other global sustainable reporting standards in their design.
Janine Hofer-Wittwer, senior product manager of financial Information at fintech firm SIX, said the sourcing of quality, veritable ESG data has become a top priority for investors. “It is no surprise that investors are now placing greater emphasis on transparency and accuracy of data from their respective data vendors. “These findings reiterate what is now a recurring theme for the asset and wealth management community – firms must pull as much data from different sources, including alternative data sources, to create as full a picture as possible. This will in turn help to navigate the growing ESG ecosystem and prove the long-term value of their investment decisions and products.”
Kifaya Belkaaloul, head of regulation at financial software company NeoXam, added: “It seems obvious that the stumbling block of sustainable finance, as well as its success, depends very heavily on extra-financial data, its quality, and its availability. To reduce the risk of greenwashing, the focus must be on establishing a common language on what constitutes a sustainable activity, standardising extra-financial transparency, and ensuring ease of access to reliable and good quality extra-financial data at lower costs.”