What is ESG data and how does it impact financial decisions, now and in the long term?

‘Environmental, Social and Governance’ (ESG) is a significant term that is becoming popular in financial and energy markets in recent times. The associated regulations, focusing on sustainability, are gaining recognition with the adaptation to 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘤𝘩𝘢𝘯𝘨𝘦, 𝘣𝘦𝘵𝘵𝘦𝘳 𝘸𝘰𝘳𝘬𝘪𝘯𝘨 𝘤𝘰𝘯𝘥𝘪𝘵𝘪𝘰𝘯𝘴 𝘢𝘯𝘥 𝘵𝘳𝘢𝘯𝘴𝘱𝘢𝘳𝘦𝘯𝘵 𝘤𝘰𝘳𝘱𝘰𝘳𝘢𝘵𝘦 𝘮𝘢𝘯𝘢𝘨𝘦𝘮𝘦𝘯𝘵 𝘴𝘵𝘳𝘶𝘤𝘵𝘶𝘳𝘦𝘴. With stakeholders focusing on improving their ESG scores to cope with pressures by regulators, investors are hesitant to invest in companies with lower ESG scores due to an increase in cost of capital in the long term. This also suggests the wide impact of ESG and its considerable influence on all sectors of financial institutions.

ESG regulations screen investments based on corporate policies and encourage businesses to act responsibly. Financial institutions need to be conscious of the current benefits of enforcing sustainability through ESG and take informed decisions.

There is an abundance of freely available data that is used to derive ESG related information. The core challenge is to find the relevant and suitable data that is applicable to the specific business and industry. Most businesses are driving towards the goal of carbon reduction/neutrality and setting targets to achieve economic sustainability. It is important to set up a suitable environment to analyze the available data with the essential tools and models to draw conclusions.

ESG data impacts a broad range of decisions ranging from Reputation to capital costs. ESG scores are inversely proportional to capital costs and hence have a notable effect on investment decisions. Currently, the regulations are developing, and companies are expected to cope with them in due time to not only avoid facing large losses but also maintain due diligence and a good reputation.

There is a broad array of data sources available for free that help dive deep into understanding the ESG related indicators and take informed decisions. They range over Weather and Sensory data, NGO/GOs, Company data, Regulatory data, Market data and Surveys and statistics.

To look at what these data sources are and to obtain fascinating insights, stay tuned to this space and follow this series closely!

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