Member Insight | ESG and the need for data

We’ve noted in earlier opinion pieces how Taiwan has adopted ESG (Environmental, Social & Governance), which is seen as best practice for ongoing corporate development, to maintain its high standing globally and be attractive for investment.

This continues to be reinforced by Taiwan’s National Development Council’s “Taiwan’s Pathway to Net-Zero Emissions in 2050.”

ESG investing, whether it be in Taiwan or globally is challenging. In my earlier piece, I noted that there is an “elephant in the room” of ESG and that “elephant" is data.

Read more: 'One solution fits all’ package for ESG doesn’t exist; The basics of 'environmental' in Taiwan's ESG; Busting the myths of 'social' in ESG

Data drives almost every aspect of our lives. From registration, IDs, banking, investing … data is king and in our current digital landscape, good data is the foundation of all good decision-making. I do not see that changing.

You will see some commentary claiming that there is a lack of data, but that is not the case. Certainly, there is a need for multiple sources to feed into calculation formulas.

There are also very pertinent questions about the time periods to which data relates. Are the time periods consistent?

If not, what impact is that having on the data? Can you normalize the data sets to make them consistent? Is the technology available to normalize data? These are the sorts of questions that are being “thrown around” and in some cases “thrown around” as a means to degrade ESG and its importance to global investing.

ESG in global arena

But why all the fuss? Can’t companies that are required to report their ESG scores simply rely upon their own methodologies, explain them and then the matter of data is settled?

Well, we may wish that to be the case, but there are numerous points to consider that contradict that notion. Also, to some extent we’ll move a bit more internationally in this piece as opposed to the earlier very Taiwan-centric pieces.

An initial point is the importance of ESG in the global arena. Data and accuracy matter because according to a recent Accenture report, the global ESG data market could be worth approximately US$1 billion in annual revenues, some three times its worth five years ago.

However, in an article in June in the online Financial News, it says: “The ESG ecosystem is a market worth an estimated US$4 trillion, which is a big pot of money ….” I’m afraid I cannot find evidence to reconcile the differences in these two reports. Is it simply a question of terminology because one source is reporting annual revenues whilst another is reporting on the “ecosystem."

Even in Taiwan it is difficult to get clear data on the value of the ESG market, though we know that the amount flowing into sustainable and ethical assets has certainly ballooned from the NT$31.2 billion in 2018, to NT$113.8 billion in 2019 and some NT$211.4 billion in 2021.

When we are talking about huge amounts of money being siphoned into what is supposed to be ESG related investment it is imperative to have clear transparency in calculation methodologies.

Easier to understand

Perhaps the ESG world was a bit easier to comprehend a few years ago when the demand for data was concentrated mostly with asset managers seeking to make green investments. That is no longer the case.

Today’s market sees an increasing demand from regulators looking to support the sustainability of small and mid-sized enterprises (SMEs). Large corporates also need reliable date to enable green supply chains — and the uncertainty of global supply chains in the current global political environment can only be adding to their concerns.

Other factors are also impacting the global ESG market and by extension the Taiwan market. We cannot overlook such issues as a limited data pool. There is no single regulatory framework, but that certainly doesn’t make the ESG market unique.

Limited auditing also brings into question the reliability of disclosure reports. I’ve seen suggestions of “greenwashing” of public reports, whereby the reports aim to highlight positive contributions to ESG whilst omitting less flattering contributions. Those that favor a global system of oversight and control note that every ESG rating agency has its own methodology which evolves over time.

What is the score?

We’ve seen that in Taiwan with the TDCC (Taiwan Depository & Clearing Corporation) announcing the addition of the well-known S&P Global ESG scores this year amid the global push for a green recovery after COVID-19. The proposed addition of the S&P Global ESG scores followed the late 2021 announcement that the TDCC is looking at the possibility of adding emissions data to its ESG dashboard to align with Glasgow COP26's climate pledges.

We are therefore faced with the very real probability that if data collection and processing is not happening properly then it is more than possible the data results are skewed, stakeholders are being misled, we are wasting valuable resources and ultimately making poor investment decisions. This provides more fodder for the ESG-naysayers.

As mentioned above, there have been some moves to see ESG reporting standards and disclosure requirements harmonized worldwide. The proponents of this harmonization point to international standards like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and others as models for ESG to follow.

This call for harmonization has appeal, but there does not yet seem to be the appetite for this to happen, certainly not within 2022. I would also point out the recent edition of The Economist that believes the ESG approach to investment is broken.

However, this article cites data as just one of the issues and one article is unlikely to change the ESG market overnight. Perhaps we will examine more concerns in future opinion pieces.

In the meantime, we shall just have to watch and wait for developments and if you are a green investor, follow the data trail, ask questions if you need to, but you must ensure you do your due diligence. Turning a blind eye is not an option.

Our member, Paul Shelton has a 30-year history in banking, working as head of Legal & Compliance and MLRO for the Asia Pacific branches of major international financial institutions in Japan, Singapore, Australia, and Hong Kong. He is also experienced in working with financial regulators across the Asia Pacific and provides consultancy services to Taiwanese financial and non-financial industry associations in all aspects of Compliance, AML/Sanctions, and Governance. He resides in Taipei.