Startups rise to solve ESG’s data problems

A NEW generation of startups has emerged to solve a critical problem for the environmental, social and governance (ESG) community: Data.

As regulators, investors and consumers become more sophisticated about impact and greenwashing, they are also demanding better accounting and analysis of sustainability metrics, industry players told The Business Times. But those ambitions often come up against a wall of problems with ESG data — a wall that startups are trying to tear down.

Too many standards

Market players and observers have cited the lack of standardisation in ESG frameworks and metrics as a major problem. 

For one, companies are spending huge resources manually compiling spreadsheets and filling out multiple surveys on their ESG performance to cater to the different methodologies and frameworks used by different providers. This cumbersome process often involves high costs, which makes it harder for smaller private companies to start their ESG reporting journey.

However, 70 per cent of ESG metrics are actually asking for the same thing, said Manjula Lee, chief executive officer of sustainability reporting fintech company World Wide Generation.

The lack of a common set of standards often results in data inconsistency. Coupled with the fact that some solution providers do not provide insight into their methodologies and the rationale behind their assessments, end users struggle to compare data across companies and frameworks.

World Wide Generation is working with Singapore Exchange (SGX) to try to solve that problem by mapping the various frameworks to one another — essentially translating between the frameworks.

In September, they launched an online sustainability reporting portal called ESGenome. The platform allows companies to upload their ESG disclosures based on their preferred reporting frameworks, and an input provided for one framework is automatically matched to similar requirements in other frameworks if the company needs to report in more than one format. Companies can then allow investors and financial institutions to view their data and compare them.

SGX head of research and products Chan Kum Kong said that the market operator decided to work with World Wide Generation after considering cost, market size and its ability to harmonise the many sustainability standards to a core set of metrics. While there were many solutions that focused on the reporting of ESG metrics and how these data are made available to end-users, not many looked at mapping the various frameworks, Chan said.

With companies spending less time and money filling out various ESG surveys, the outcome would be a market more responsive to developments in taxonomy frameworks, Chan said.

Too much bad data

One common gripe is that there is too much noise in the ESG data, and significant swathes of ESG data are inaccurate and out-of-date.

Wong Kok Hoi, chief executive officer of APS Asset Management, said that most companies’ share prices are often driven by ex-ante information. However, most ESG data providers only have historical or ex-post data.

“So most of the things that data systems will look at will update once every three months or once every six months. Share prices don’t wait. There are many investors out there who want to act fast,” he said.

Startups are using artificial intelligence to try to scour various sources for information from companies, including unlisted ones, and analyse that data. Besides public disclosures, data sources often include news articles and social media chatter to capture qualitative information.

At ESG Book, chief executive Daniel Klier told BT that the companies and investors can go beyond the ratings and analysis provided and look for the raw data and actual source document.

“So we treat non-financial information in the same way as Bloomberg has been treating financial information for the last 20 years,” he said.

Nexus FrontierTech — which has developed a platform for ESG data analysis focused on Asian companies with APS Asset Management — gives clients the ability to customise ESG data.

This allows investors to take on different investment strategies, said Derrick Liao, chief operating officer of Nexus FrontierTech. It also reduces dependence on ESG ratings that may not capture the quality of a company.

Too little regional data

Then there is the challenge of insufficient data from emerging markets. This is especially the case when it comes to Scope 3 emissions — indirect, non-power emissions — given the difficulties getting data along a company’s supply chain.

Stuart Wilson, head of sustainability at asset manager Eastspring Investments, said that up to 30 per cent of carbon emissions data in Asia is estimated. Data is virtually non-existent in some markets, such as Vietnam.

Estimation hurts Asian companies, because estimates typically tend to be conservative. In Asia, where many corporations are still not reporting their ESG metrices, investors might have to assume the worst, noted Vivek Lath, partner of McKinsey & Co.

The importance of having local data sources is highlighted in the case of Luckin Coffee. The China-based coffee chain was exposed for accounting fraud in April 2020, but local Chinese media had already been reporting problems with the company two years before the scandal broke globally, pointed out Danny Goh, CEO of Nexus FrontierTech.

The more locally sourced these ESG information are, the greater the depth of a company’s data, extending down to its supply chain, he noted.

MioTech, an Asia-based ESG data platform, gathers ESG information on companies from local sources in local languages. That addresses the fact that Asian economies are still dominated by unlisted companies that do not have public disclosure requirements, said MioTech president Jack Lin.

Assessing Asian companies using global standards also means judging them through a European lens, said Goh. And Asian startups feel they are in a better position to make these assessments.

When it comes to the social and governance data, “they’re inherently social values embedded in these judgments,” Lin said. “So they may or may not be as relevant for Asian markets.”

Challenges ahead

Despite inroads made by startups in this space, Melissa Moi, head of sustainable business at UOB, said that the small and medium-sized enterprises (SMEs) still require support.

“To ensure the viability of such solutions, it is key that they are usable and feasible for SMEs to gather and track their information. The technology must be simple, easy to use and as automated as possible,” she said.

Wilson from Eastspring noted that the mapping and plumbing of data points, as well as the way the interface in which these are presented, is an aspect that startups often overlook.

The growth of this industry has meant the need for vast amounts of ESG data, which are often unstructured and “dirty”, to be processed and presented in a way that is usable for investors and other end-users.

Lin noted that data organisation and management is one of the biggest challenge for the industry.

“The company that can deploy technology to solve this problem of data management will come up with the best solutions, meaning that the solutions are the most efficient at predicting the ESG attributes that we’re trying to measure and capture,” he said.