Bloomberg: Regulation Driving Demand for ESG Activities Data

Regulators’ efforts to impose standards on the freewheeling world of environmental, social and governance (ESG) investing are maturing. In the process, Bloomberg is seeing increased demand for data that helps analysts understand the actual environmental impact of the companies they cover, says Nadia Humphreys, business manager for sustainable finance solutions at the data giant.

“Where demand now exists, and data needs to catch up, is more at an activity level [as opposed to the entity level],” Humphreys says. “We are seeing from a Bloomberg perspective that people are now interested in what we call fundamental data, or the production datasets, that look at things like the make-up or segmentation of a company’s activities, and also start to look at things like the supply chain that exists for that corporation.”

Analysts at asset management firms and in banks’ research departments use data from Bloomberg and other providers, such as Refinitiv, S&P and MSCI, as well as specialists like Sustainalytics, to assess companies’ performance and understand their ESG impact.

Bloomberg’s own ESG offerings are mainly available through its flagship terminal, where it is displayed alongside the fundamental financial data. The company has, however offered a licensed feed for enterprise-wide use since 2018. Humphreys says the terminal provides “as-reported” data: data supplied by some 12,000 corporates in sustainability reports, annual accounts, websites and other public sources. This data can be supplemented with industry primers and reports available in the terminal from Bloomberg Intelligence, the company’s research arm, and integrated with other indices and analytics, including users’ own sustainability scores and ratings from third-party providers.

Users at asset management firms tell WatersTechnology that while these ratings are a good place to start analysis, ratings providers use their own methodologies and weightings, and so the ratings are black-box and uncorrelated. These users are now turning to their own internal scores and metrics, and looking for more data, much of it unstructured and from alternative sources, for information on the activities of corporates, their supply chains and carbon footprints, rather than just assigning scores to particular entities.

Humphreys concedes that there are criticisms in the market that data is backward-looking.

“Typically, what you find when you speak to asset managers is that the lack of standardized data can be problematic for them as they start to decide, what does good look like within a particular sector, or within a particular group of companies? If they took a simplified view, that would mean that the relative value comparison of a simple dataset is not necessarily going to give them the results of something that is more integral and unique to the nature and operations of a particular company,” Humphreys says.

“Asset mangers are still trying to understand all the data that exists out there, and being able to compare it between companies within the same sector, and between geographies.”

But, she says, regulation is driving transparency, across the ESG industry. ESG investing has been around in one form or another for decades, but it’s only as investors have started worrying about the existential threat that a four-degree Celsius increase in global temperatures poses to humanity that it’s become as in-demand as it is right now. And regulation is still catching up.

Some of the trends that Humphreys sees developing now are “integrating sustainability into broad risk management practices, fostering long-termism in investment products, and creating what they call transparency—ultimately to try and prevent greenwashing.”

Humphreys says, for a start, that bodies like the Financial Stability Board (FSB) are developing frameworks for disclosure that will improve what corporates report. The FSB’s effort is the Task Force on Climate-Related Financial Disclosures (TCFD), a group of finance industry representatives, established to develop recommendations for clear, consistent climate-related disclosure by listed companies and others. The TCFD is chaired by Bloomberg founder Mike Bloomberg.

Humphreys says as-reported data has historically been patchy in certain sectors, and partial in its coverage. This is especially true of carbon emissions reporting. Companies generally reported their Scopes 1 and 2 emissions—respectively, their direct emissions from their activities, and their indirect emissions from the electricity they used. But reporting on Scope 3—all other indirect emissions from the activities of suppliers or third parties, was much less consistent. Scope 3 has by far the most impact on the depth of a company’s carbon footprint.

There is no mandatory reporting regime in any country where public companies have to report their ESG metrics, though they might incidentally report some key ESG data in other mandatory filings, and the Securities and Exchange Commission does ask for materiality disclosures.

This is where the EU hopes that its new taxonomy for environmentally sustainable activities, part of a broader regulatory trend to prevent greenwashing, will improve matters, Humphreys says. The taxonomy is chief among a raft of legislation published by the European Commission in March 2018, as part of its action plan on sustainable finance. The taxonomy is an example of a broader regulatory trend of improving reporting and preventing greenwashing.

“The EU taxonomy has a big bearing on this, in that it says that if you are a conglomerate with a diversified business portfolio, just giving us an entity-level emissions figure doesn’t allow us to work out the environmental risk of your operations,” Humphreys says.

Regulation Matures

The EU taxonomy establishes a classification system to create a common understanding of which economic activities can be considered environmentally sustainable. A technical expert group (TEG) set up by the EC has been developing the taxonomy, and in March published its final report. The taxonomy is essentially a glossary that defines performance criteria of different economic activities, such as the growing of perennial crops or afforestation, and these criteria are aligned with the UN’s Paris Agreement goals.

The taxonomy forms the basis for other rules that affect investment firms. For example, under an amendment to the Disclosure Regulation, firms will have to report on how their financial products, such as investment funds and pensions, align with the taxonomy.

Humphreys herself was a member of the TEG. She and two buy-side representatives were specifically tasked with examining the usability of the taxonomy for its users, how they could develop their disclosures and reporting frameworks.

Humphreys says that a developing trend in ESG regulation is on the prudential side—the type of regulation that requires financial institutions to control risk and hold capital and liquidity reserves in case of systemic shocks. The buy side is somewhat ahead of the sell side in this area, as Europe’s insurance regulator has already started piloting stress testing insurers’ balance sheets for climate-related risks.

But the sell side is catching up, as the Bank of England (BoE) opened consultation on its own climate stress test scenarios in December 2019. The BoE is a member of a network of central banks that in 2017 formed to push for a greener financial system; these central banks have collectively pledged support for the TCFD recommendations, and are expected to use TCFD scenarios in their own stress testing exercises.

“If you look at prudential regulation, everyone responsible for financial stability is starting to push for frameworks like TCFD because they want companies to start to disclose risks and opportunities as they relate to climate, and where there is materiality in those risks and opportunities. And we are seeing a big trend globally for climate-related stress testing and scenario tools that allow companies to plan for two- and four-degree worlds,” Humphreys says.