Data Capital: EY and the efforts to make ESG as easy as ABC

COMMENT: Stuart Wallace of EY tells David Lee that – if we get it right on environmental, social and governance – the sky’s the limit

Stuart Wallace of EY: “It’s about how we manage planetary resources, and manage our obligations to each other as a society”
Stuart Wallace of EY: “It’s about how we manage planetary resources, and manage our obligations to each other as a society”

Is ESG as easy as ABC when it comes to data? Clearly not. There are multiple challenges to address about how we measure Environmental, Social and Governance (ESG) data accurately, and what we do with it.

But if we get it right, Stuart Wallace, EY’s Financial Services Scotland Data Leader, believes the sky’s the limit in terms of what can be achieved. “ESG data has got challenges including sourcing, understanding, quality and trust, but for the most part we’ve overcome the initial hurdle, as we’ve identified them, we know the root cause,” he says. “We have the technology to deal with them. With sustained attention and focus, we can make a difference. ESG data must become an opportunity to understand how the world works, and we should look to use all insights to focus on activity which will make a difference.”

One opportunity, and challenge –simultaneously – is the sheer breadth of such data. “This is data that organisations are using to manage [ESG] objectives, so it can cover an endless range of things, from carbon emissions and water quality, to the diversity of boards and salary differentials,” he says. “It’s about how we manage planetary resources, and manage our obligations to each other as a society.”

Data Capital: Making ESG as easy as ABC

Wallace says it’s about making sense of the huge amount of new ESG data coming online – and realising its value. “It’s so broad. There are traditional data sources, from data vendors and aggregators and ratings agencies, as well as an increasing number of scientific data sets, including data from sensors, smart meters, wind turbines, agricultural devices, autonomous vehicles and so on.

“On top of that, there’s a lot of unstructured data – especially from social media.”

So how do we unpick this huge quantity of ESG data to find what is trustworthy and useful? “It must be outcomes-driven; what do you want to use it for?” asks Wallace. “It is also essential that we recognise any limitations to the data.

“The financial crisis taught financial services organisations a lot about data management which can be applicable to ESG. For example, transparency and analysing limitations, but also about how to produce and manage data sets. There’s growing global regulatory attention on the transparency of that data.

“I think the obligation for more transparency across the ESG data supply chain goes beyond the competitive nature of firms looking after their own IP. For priorities like ESG, we need enhanced collaboration and transparency – more information about how decisions are made and what data they’re using, so people can make sense of the value of that data.”

Wallace says the three key words in ESG when it comes to data are transparency, consistency and auditability. A recent EY survey showed that 89 per cent of investors would like the reporting of ESG performance to be measured against globally consistent standards as a mandatory requirement. How are we doing?“COP26 was a big step forward, leading to a new international sustainability standards board that works to develop a common way of financially reporting ESG metrics. There’s much to do still, but we’re on a good path and are travelling in the right direction.”

However, a significant challenge remains in the multitude of global sustainability taxonomies – effectively how we classify what is sustainable. “Even within the EU taxonomy, there’s a risk that different members will adjust it for their own particular purposes. For example, nuclear energy could be green in one country but not another.

“But from a data perspective, if you’re transparent in how you report through those taxonomies and you can trace back and be auditable, multiple taxonomies can be supported.”

Wallace argues that different standards are only frustrating if used as an excuse for inaction: “We have lots of different cultures with different value systems across the globe that have to find common ways of working yet support multiple taxonomies. Technological innovation should help here, as well as bigdata processing which offer speed and scale.

“That doesn’t mean it’s simple, but there are ways to work around differences and bring the global community together for a single purpose!”One crucial shift in ESG data is the move towards viewing the impact of an organisation’s actions on the environment and society, as well as the impact of specific ESG factors on that particular organisation.

“This is a really knotty topic,” says Wallace. “It’s called materiality. When a decision is made, it tends to be about financial materiality. Is this going to benefit or harm our balance sheet?

“With ESG, you get double materiality where – particularly larger – companies look at the financial impact of that decision, but also the climate and societal impacts.”

Wallace feels this will take time to embed, although younger people – and, importantly, younger investors – are increasingly interested in companies that take their ESG impact seriously.

“I’m cautiously optimistic that consideration of ESG impacts is becoming more embedded in the way organisations think, and is playing a larger part in how they attract and retain talent. It’s what their employees want them to do, and what customers want them to do.”

Yet larger global impacts are at play. “The biggest current risks to the ESG agenda is the global geopolitical and economic situation. With recent rises in energy prices exacerbating broader supply chain issues, there is a growing voice saying: ‘Let’s get back to fossil fuels for a while to get us through.’ There’s a risk of people taking their eyes off the ball, but I’m optimistic overall – especially about global collaboration on ESG.”

Wallace works with not-for-profit industry body the Enterprise Data Management Council. “We have an ESG data working group, and that’s got a genuinely global representation, from ratings agencies, data aggregators, banks, car manufacturers, software companies, coming together to produce papers on the state of ESG data. It’s that sort of crucible that’s driving progress.”

For progress to continue, Wallace says the corporate world has to be front and centre: “I was at a data recruitment event and data science graduates were surprised the corporate world is interested in this. They thought they would have to join a charity or activist group to make a difference. If you’re going to build a better working world with ESG data, it’s got to happen in the boardrooms of the big banks lending out the money to invest in that transition.

“ESG Data is going to be transformative, improving society and supporting planetary welfare – and that should be quite motivational, and rewarding.”

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