ESG Due Diligence: How to collect better pre-investment data

Why collect ESG data for pre-investment?

Assessing environmental, social, and governance (ESG) performance is becoming a critical part of the due diligence and voluntary reporting process for investment, financing, and insurance decisions. There are many connected reasons for the rising importance of ESG reporting and performance, including:

• the shift to consider ESG in the financial sector;
• a positive correlation between ESG and financial performance;
• record investment into ESG funds;
• the increasing pressure from regulators to report on ESG decision making; and
• the risks associated with non-disclosure and non-compliance.

All the above are true. But it is important to include the bigger picture: the climate crisis. Taking action to reduce environmental impact is the right thing to do for the future. After all, without a liveable world we won't have much to invest in. For businesses and investors, that means ambition beyond meeting minimum requirements and regulatory check boxes.

So once financial firms look to integrate ESG data into their due diligence and risk assessment processes, they are faced with the reality that ESG data is often fragmented and difficult to collect and analyse. So what can we do about it? 

Where can I get ESG data?

ESG data can come from a variety of sources. In general, these sources can be sorted into three categories:

1. Data reported directly by the company (Examples: Annual or quarterly sustainability reports, financial disclosures, submissions to standards providers, questionnaires): company-reported data is the first and most obvious source of ESG data for due diligence. Depending on the size, location, and transparency of the organisation in question, this data may be publicly accessible.

2. Third-party collected data (Examples: MSCI, Refinitiv, Sustainalytics). You may purchase or licence ESG data from third-party providers to help with your due diligence process. Often, this data is made available in the form of ESG ratings or scores. Get a breakdown of the most popular ESG data providers in this guide.

3. Alternative data (Examples: Geospatial data, social media sentiment data): Alternative data providers offer auxiliary information that can be used in conjunction with more traditional data sources.

Take note: Rising regulatory pressure

Within the past few years, several ESG disclosure standards for financial firms have either come into effect or been drafted, particularly in the UK and Europe. Including:

• Sustainable Finance Disclosure Regulation (SFDR) - in effect
• EU Taxonomy - in effect
• European Banking Authority (EBA) Pillar 3 Implementing Technical Standards (ITS) - drafted
• Alternative Investment Fund Managers Directive (AIFMD) - in effect
• Non-Financial Reporting Directive (NFRD) - in effect, may be amended by CSRD
• Corporate Sustainability Reporting Directive (CSRD) - draft approved by the European Commission
• Sustainability Disclosure Requirements (SDR) - expected in 2022
• UK Stewardship Code - in effect
• Task Force on Climate-related Financial Disclosure (TCFD) - in effect

The US is also expecting similar disclosure requirements from the Securities and Exchange Commission (SEC). Though few details have been established, implementation is expected as early as 2022.

What kind of ESG data should I collect?

	People: Look for documentation on employee diversity and inclusion, employee health and safety, employee learning, development opportunities, equal pay, and human rights due diligence throughout the supply chain.
	Prosperity: Look for documentation on product/service research and development, job creation, community investment (e.g. charitable donations, community partnerships), and tax reporting.
	Principles of governance: Look for documentation on composition of governing bodies (e.g. board of directors), code of ethics, and stakeholder engagement.
	Planet: Look for documentation on energy and water usage, waste, carbon footprint, and pollution.

How should I collect ESG data for due diligence?

The best approach for collecting ESG data varies depending on how much access you have to the target organisation. We’ve provided two different approaches based on whether you have a high degree of access or a mid-to-low degree of access.

High degree of access

Clarity is key: To gain access to data that is accurate, verified, complete, timely, and comparable, you need to specify the metrics required and the process for gathering them. This includes what they need to record, along with specific guidelines for how, where, and when they need to record it.

Mid-to-low degree of access

Use reporting frameworks: Using comparable metrics such as those found within ESG reporting frameworks helps compare apples with apples.

Leverage the power of automation: Best-of breed technology can make the data collection process easier, faster, and more accurate.

What are some important questions to consider?

There are two more important questions to consider when deciding what kinds of ESG data to collect:

Should I collect qualitative or quantitative data?

While quantitative KPIs (e.g. kWh, tonnes of waste, cubic metres of water) provide evidence of performance and lend themselves to detailed analysis and like-for-like comparisons, you should be gathering both quantitative and qualitative ESG data as part of your due diligence process.

Qualitative supporting evidence (like ESG policies, commitments, and governance data) can give you a clearer idea of the ESG risk faced by an organisation, their processes and their overall resilience. In the event that a company has just started their ESG reporting journey, qualitative policy statements can give you an early insight into the intentions and critical awareness of an organisation enabling you to spot opportunities early. Ideally, both types of data will be stored in one centralised platform.

Is the data I’m collecting material?

Not all ESG data is equally relevant. Before you start collecting data, you should identify which ESG issues are most likely to impact, and be impacted by, the target organisation. This process starts with performing a materiality assessment to help you identify the social and environmental topics that matter most to the target organisation, as well as which topics will have the biggest impact on their performance.

What next?

This blog is a shortened version of our longer, more detailed Data Collection Guide for Financial Services which explores ESG Due Diligence, Compliance, and Voluntary Reporting. You can download the full guide for free to see more insights, tips, and approaches for data collection. Our guide also includes industry perspectives, including their unique challenges and approaches to ESG data collection.

While it was created with the financial services sector in mind, you'll find insights relevant for all kinds of organisations, including for businesses looking to raise capital, or even just to understand what investors are increasingly looking for and what to start tracking.

Want to talk to us about solutions for ESG data collection for your business? You can read more about our solutions, or reach out to talk to us directly.