Investments related to environmental, social, and governance (ESG) are expected to account for more than one-third of total global assets under management by 2025, reaching $53 trillion in value. With that kind of money at stake, it’s not surprising that ESG datasets—and the specialist providers that create and supply it—are in high demand.

According to Bloomberg Intelligence, which produced these forecasts, ESG assets are expected to reach $37.8 trillion by the end of this year. And its 2025 prediction could even prove conservative: The vendor arrived at those figures by assuming 15% growth rates between now and then—but that’s only half the pace at which ESG assets have grown over the past five years.

Last year, research and advisory firm Opimas estimated that the market for ESG data (including ESG indexes) was worth $617 million in 2019, and could reach $1 billion by 2021, with ESG data expected to grow at 20% and ESG indexes forecast to grow at 35%. Compare that to the market data industry overall, where spend on data rose 5.9% in 2020 to an estimated $33.2 billion, according to Burton-Taylor International Consulting.

It’s still worrying because you risk creating an oligopoly. With a handful of providers controlling most of the ESG market, you become dependent on a few players, and there is a risk that they abuse their pricing power. With any expansion of coverage and inputs, you often see an increase in pricing. 

Emmanuel Hauptman, Ram Active Investments

The result of this ESG investing frenzy has been a flurry of merger and acquisition (M&A) activity among ESG data providers and mainstream data vendors looking to gain a foothold—or bolster an existing presence—in the ESG space.

“I would say the three impacts are competition, costs and consistency,” says Bloomberg Intelligence analyst Athanasios Psarofagis, who highlights a trend of index operators buying ESG data providers.

“First, competition: The acquisition of ESG data businesses will increase competition, particularly against MSCI, which dominates the market. Most index providers previously relied on third parties for ESG data, and bringing it in-house increases their flexibility. Second, cost: Purchases of ESG data businesses by index providers might allow for even cheaper fees on passive products as firms seek to compete to gain market share.”

However, on Psarofagis’ third point around consistency, he notes that since ratings diverge for ESG scores and index providers, each will pursue their own strategy, which may hamper convergence of standards—at least in the short term.

For example, in the index space, S&P Global acquired ESG analytics provider Trucost in 2016, then the RobecoSam sustainability indexes in 2020.

But there are even more examples beyond index providers. Most recently, Swiss exchange operator, data vendor and market infrastructure provider Six bought a majority stake in Canadian ESG- and alternative data-focused artificial intelligence (AI) platform Orenda, which would allow the company to develop new products for those interested in impact investing.

Around the same time, Deutsche Börse acquired Institutional Shareholder Services—itself in the process of buying Canadian startup Acre Data, which provided ESG scoring and ranking for municipal bonds—to position itself as a leader in what it called the “megatrend” of ESG investing. The exchange also recently led a $15 million investment round in Clarity AI, a big data and machine learning startup focused on sustainable investing analysis.

At the end of last year, Nasdaq Ventures made an undisclosed “strategic investment” in Copenhagen-based sustainability analytics and reporting provider Matter, which already powered Nasdaq’s ESG Footprint solution that allows investors to measure their portfolio’s ESG impact.

In October 2020, FactSet announced it would buy San Francisco AI-driven ESG scores startup Truvalue Labs, citing the record inflows into ESG investments, and demand for ESG data. And in April 2020, Chicago-based data and research provider Morningstar announced its acquisition of ESG ratings and research vendor Sustainalytics, in which it had held a 40% stake since 2017, to incorporate sustainability analytics into “every level” of its data used by investors.

And in 2019, ratings agency Moody’s made an undisclosed majority investment in Berkeley, California-based climate risk score and climate data provider Four Twenty Seven. Officials said the move would make it easier for investors to incorporate climate risk into their investment decisions.

The trend of large data providers acquiring ESG specialists isn’t new—Thomson Reuters bought Swiss ESG data vendor Asset4 in 2009—but has definitely accelerated over the past two years. And while this has proved a windfall for the owners of these companies, will it be good for investment firms that consume ESG data, and how will it contribute to drive ESG assets toward—or beyond—Bloomberg Intelligence’s predictions?

What’s in it for me?

Emmanuel Hauptman, partner and head of systematic equities at Ram Active Investments (Ram AI), says M&A in the ESG data space presents upsides and potential downsides. Positive aspects include that vendors will gain broader coverage, consumer firms will get access to more complete datasets, and concentrating vendors tends to result in better quality data.

However, he notes some concerns—the same concerns that usually arise around consolidation in a competitive market. “It’s still worrying because you risk creating an oligopoly. With a handful of providers controlling most of the ESG market, you become dependent on a few players, and there is a risk that they abuse their pricing power. With any expansion of coverage and inputs, you often see an increase in pricing,” Hauptman says.

While merging companies claim they’ll deliver savings for customers, those savings don’t always materialize as new owners wring additional revenues from their purchases. Fire Capital Management, a San Francisco-based boutique investment manager that uses ESG sources including Morningstar/Sustainalytics, FactSet/Truvalue, and MSCI, hasn’t seen this play out yet, but is seeing vendors flex their newly acquired ESG muscles.

“We haven’t seen prices go up, but we have seen providers reflect their pricing power and not offer discounts,” says Jim Ulseth, chief investment officer at Fire Capital.

But even when the ink dries on acquisitions, it may be a while before vendors can exploit that pricing power, because it may still take a decade to whip disparate ESG data sources into shape.

Chris Johnson, senior product manager for market data at HSBC Securities Services, says that even with an aggressive timescale, it may take between five and 15 years for ESG data to more closely resemble financial data. For example, some ESG datasets still don’t map to common identifiers such as International Securities Identification Numbers (Isins), he says, adding that regulatory requirements will help drive this, as will greater investment in the data.

“As these M&A deals go through, that means there is more funding, and ESG data becomes more integrated into larger datasets,” Johnson says. “In 2015, there were a lot of independent companies doing ESG data. Now, more of these are getting acquired, and that has to be a positive thing because it leads to easier-to-integrate data. It’s about making ESG data more consumable with broader coverage.”

ESG is the biggest thing we’ve seen for many years, and likely the biggest thing we will see for the next decade and beyond. This is like the start of financial reporting. 

Eric Bigelsen, EDMC

The regulatory drivers include Europe’s Sustainable Finance Disclosure Regulation, while other regulators and standards bodies are looking at how to increase and improve sustainability reporting, such as the IFRS Foundation, which has proposed a Sustainability Standards Board—the CEOs and chairs of some of the largest data providers recently signed a joint letter supporting the proposal.

“ESG is the biggest thing we’ve seen for many years, and likely the biggest thing we will see for the next decade and beyond. This is like the start of financial reporting,” says Eric Bigelsen, a data industry veteran and a senior advisor to the EDM Council, who currently serves as head of the EDMC’s ESG working group.

“These are not traditional metrics, and there’s a lot of work involved in pulling these together. There are a lot of debates going on at various governments, regulatory bodies and standards organizations … about materiality issues associated with ESG. It will definitely have a significant impact on capital flows,” Bigelsen says.

That’s one factor driving the demand for data, as well as driving demand for an ESG business among those companies buying ESG data providers. It’s also driving the involvement of bodies like the EDMC, whose ESG working group—created just over a year ago at the request of three financial firms seeking guidance on how to address the lack of standards and consistency in the evolving ESG landscape—now comprises more than 80 organizations from different industries around the world, and 120 active participants.

Mind the gap

These inconsistencies—both in how firms have reported ESG factors until now, and also in how data providers aggregate and present that data—are often cited as a challenge to using ESG data more widely. Thus far, firms have had to figure these out for themselves, using technology to deliver the desired results.

“A lot of companies are doing really good work on the research, ratings and data aggregation side. And software companies are thinking about how you can apply machine learning and artificial intelligence, and other advanced analytics,” Bigelsen says.

One such advanced analytics technology provider is Databricks, which has spotted how firms’ eagerness to tap into ESG is being frustrated by the challenges associated with ESG data.

“The correlation between data vendors is 0.6—there’s greater correlation between ice cream and shark attacks!” says Junta Nakai, regional vice president and global industry leader for financial services and sustainability at Databricks.

“It’s going to take years for standards to coalesce. Asset managers don’t have the luxury of waiting years for standardization—and standardization won’t answer the question of how important a metric is. Market data is simple—it’s numbers and timestamps. Sustainability data is not like that,” Nakai says.

Nakai notes that almost all companies in the S&P 500 index now produce sustainability reports, but says that often, only two pages of a 70-page report contain easy-to-extract numerical data. The rest is unstructured text data or images. And it’s not just that ESG information is overwhelmingly unstructured, he says—it’s also incredibly diverse. Understanding that will require “enormous amounts of AI,” he says.

Of course, AI is one of the things Databricks does. But the company is already doing this for clients ranging from asset managers to ESG data providers wanting to present their data in a more easily consumable way. For example, “one of the largest asset managers in the world” has built ESG analytics on top of Databricks’ Lakehouse platform to monitor “hundreds of millions of data points per day,” Nakai says, while S&P Global uses Lakehouse and Databricks’ notebooks environment to power its Analytics Workbench, which analyzes data from S&P’s Trucost and Sam acquisitions.

In other cases, buy-side firms are tackling the challenge of unstructured data in-house. Ram AI, for example, has built its own natural-language processing platform with “a wide lexicon of issues related to ESG” to capture as much information on a company and its environmental positioning, along with news and sentiment data to predict the impact of news on a company.

“It’s much more dynamic and real time than ESG ratings, which also take time to integrate,” Ram AI’s Hauptman says. “It’s very valuable. We still find value in ratings. It’s complementary.”

Technology can bridge the gap until standardization efforts take hold and can address these challenges more fully. But the current M&A trend is also indirectly addressing this: As ESG specialists with proprietary data and formats get absorbed into larger organizations, they will typically be shoehorned into the acquirer’s established and well-understood data formats, automatically ironing out some of those data challenges.

In terms of industry evolution and maturation, it’s important that these datasets are not siloed, and that they get integrated into ‘traditional’ data platforms. 

Justina Lai, Wetherby Asset Management

Justina Lai, chief impact officer at San Francisco-based Wetherby Asset Management, believes this can contribute to harmonization and standardization. “Each third party has a slightly different methodology or approach. I’m not sure a third-party practitioner should be the arbitrator of approaches, but if they listen to investors, these mergers could result in more standards,” she says.

In addition, these datasets can—and must—become more tightly integrated with the data offered by their new parent organizations. “In terms of industry evolution and maturation, it’s important that these datasets are not siloed, and that they get integrated into ‘traditional’ data platforms,” Lai says.

Integrating those datasets into the operations of much larger businesses also gives them greater leverage when asking companies to report data, resulting in more and better data being available. This also provides greater scale and resources to ensure higher data quality, she adds.

A knock-on benefit for end-user firms is that the consolidation results in fewer vendors that market data mangers need to deal with, and that the ESG data will now be available via well-established vendors with whom the firms probably have existing relationships and contracts.

Being able to obtain ESG data pre-integrated with other types of market data is an advantage for end-users, rather than needing to source separate datasets from different providers, says Fire Capital’s Ulseth.

“What we hope to see is a fragmented market achieve more cohesion,” he says. “We’ve already seen more adoption of some datasets that we use … compared to even just a couple of years ago when this area was more fragmented.”

What’s in it for them?

But, despite the wave of recent acquisitions, ESG data still remains largely fragmented. The recent consolidation doesn’t mean the ESG data market is contracting—after all, the M&A activity hasn’t reduced the number of ESG data sources, but rather places those data sources alongside other sources of “traditional” data.

In fact, there’s still a “multiplicity” of vendors in the ESG space, all of which must be accommodated by platforms such as BNY Mellon’s ESG Data Analytics, which enables clients to evaluate performance relative to benchmarks, institutional guidelines, and the effectiveness of allocations and fund managers, among other factors, depending on their investment objectives, says Frances Barney, head of global risk solutions at BNY Mellon Asset Servicing.

“ESG lends a new dimension to analysis,” Barney says. “In many cases, you need to look at multiple approaches because there are not clear definitions of use cases, so looking at multiple frameworks and providers is the best way to avoid big risks,” Barney says.

This creates even greater opportunities for new providers to emerge, in addition to existing providers, because the lack of standard metrics—say, around climate risk—means a lot of research is required to fully assess risk, says Corinne Neale, global head of business applications at BNY Mellon Asset Servicing.

Twenty years ago, Trucost Analytics was one of these new providers, trying to standardize ESG reporting among top-listed companies. When those companies balked at what was required, Trucost flipped its model to working with asset managers, and in 2004 was the first company to assign a carbon score to a portfolio.

But soon, Trucost CEO, Richard Mattison—now chief product officer for ESG at S&P Global—could see change on the horizon, and evaluated Trucost’s role in the future ESG world.

“When we built Trucost, we thought we could go it alone, and be a new data business. Sometime around 2010, I realized there is so much change in the world, and data is one element, but there are others … and our data would need to be integrated into other areas of the capital markets,” Mattison says.

By 2016, it was clear that S&P was the perfect home for the vendor: It had the largest index benchmarks, the largest ratings business, S&P Global Market Intelligence with more than 300,000 users, and S&P Global Platts’ price benchmarks for oil, gas, and other commodities markets—and Trucost could offer its ESG expertise as standalone solutions or integrated into S&P’s offerings, for example, mapping S&P’s asset ownership level data on public and privately held companies and mapping those to their exposure to climate issues.

“By integrating Trucost into S&P, you’re integrating climate data into the heart of the capital markets and reducing the friction of incorporating ESG factors,” Mattison says. “If you can re-frame a benchmark to be more forward-looking, you have an opportunity to shift capital at scale.”

That combination of ESG expertise and skills with other, broader capital markets datasets such as asset ownership data is one major argument for consolidation for ESG data providers, Mattison says. “Trucost as an independent organization could never have delivered that,” he adds.

FactSet and Truvalue echo these sentiments when describing their own integration.

“Truvalue’s integration into FactSet will strengthen our offering and provide new and unique insights that wouldn’t have been possible if we had remained independent. Most importantly, though, it’s valuable for the end user, allowing the market to have a frictionless experience and combine the best datasets and technology for the clients’ benefit,” says Hendrik Bartel, co-founder and CEO of Truvalue Labs, and now senior vice president of strategy at FactSet. “ESG is mainstream and has become an important factor in determining investments. It’s essential for FactSet to have our own data and move beyond being an ESG integrator.”

Bartel says the combination of Truvalue’s ESG data with FactSet’s sector, fundamentals, supply chain, industry classifications, people, and governance data, among other datasets, “will help clients embed ESG into every phase of the investment process.” Specifically, he cites the integration of Truvalue’s ESG content into FactSet’s portfolio analytics suite and workstation, and broader distribution via the vendor’s datafeeds and APIs, and its new ESG Ranks service that delivers a top-level assessment of more than 6,000 companies, as initial big wins.

“Another big win involves FactSet’s open data ecosystem. Clients can combine FactSet content as well as content from other leading ESG providers to create their own composite ESG scores and create unique investment products. This is huge,” Bartel adds.

Competitive challenges

S&P and Trucost were among the early players to see the ESG writing on the wall. But is the current spate of M&A activity reflective of the high demand for ESG data, or is it a sign that niche providers need scale to survive, or that the market cannot support so many competing providers?

There are still plenty of providers and offerings, though, says John McLean, founder and managing director of Acre Data, and now executive director of ISS ESG. But, he warns, “As in any industry, it doesn’t mean all will survive. They have to offer something unique. And there will certainly be some attrition.” Nevertheless, he remains positive about the benefits of consolidation overall in the ESG space.

Sustainability has become mainstream very fast and is resulting in a need for data to support that. The data industry to support sustainability is evolving rapidly, but that doesn’t mean the industry is mature. 

Corinne Neale, BNY Mellon Asset Servicing

Though there’s an obvious need for standardization, which doesn’t appear to equate to a need for rationalization: The broad nature of ESG appears sufficiently diverse to support a range of competing, mostly complementary, providers. If anything, the industry is simply going through growing pains as it rapidly evolves.

“Sustainability has become mainstream very fast and is resulting in a need for data to support that,” Neale says. “The data industry to support sustainability is evolving rapidly, but that doesn’t mean the industry is mature.”

Indeed, the “disparity and deviation” between ESG analytics is a testament to this, adds Carl Balslev Clausen, director of ESG investing at software vendor SimCorp.

“This creates an administrative challenge for some asset managers to report on, and for investors to compare products and understand what they are buying into,” he says. “Some of this deviation in the top-level ratings may be due to a lack of quality and metrics. But there is also another reason: Top-level ratings are subjective like analysts’ buy/sell recommendations. They correspond to a specific perspective on ESG issues and also to a specific purpose, which can be on a wide spectrum, from pure financial materiality to societal impact.”

These qualitative aspects make standardization challenging, and Clausen says that while consolidation may create a kind of standardization by converging these perspectives into smaller numbers, it may equally transpire that no prescriptive standard evolves, and a small number of large vendors dominate with proprietary weights and conversions.

SimCorp contends that this places greater emphasis on tools—such as its own SimCorp Datacare Data-as-a-Service offering—to automate data management processes such as cleansing and reconciliation that can bring transparency to ESG metrics, enabling firms to devote more time to generating proprietary insights from ESG data to improve investment decisions.

BNY Mellon and SimCorp—along with all the acquisitions so far—aren’t the only ones vying for a slice of the ESG data pie. Almost everyone has an ESG angle.

“Currently, around 2% of market data spend is on ESG data. But with new regulations and initiatives coming, I expect that to increase—and data vendors are all trying to get a share of that,” says HSBC’s Johnson.

For example, the merger of ISS and Acre Data into the Deutsche Börse fold creates “tremendous opportunities” for different business areas to leverage each other’s data to expand to new markets, McLean says.

Outside the box …

In some cases, expanding into new markets beyond applying ESG data to individual companies—or, in Acre’s case, municipal bonds—may lessen any concerns about current M&A activity in the ESG space.

There’s a growing movement among buy-side firms to obtain data directly from non-governmental organizations or via proprietary research rather than from established ESG data vendors, while for organizations that invest in sustainability-driven companies or projects that aren’t listed on an exchange (and are therefore open to limited outside investment), data collection is a time-consuming and labor-intensive process that must be conducted firsthand, since much of the data they seek doesn’t exist anywhere commercially.

Take Helsinki-based development finance firm Finnfund, for example, which recently reported its investment portfolio is net carbon negative. The fund typically invests in socially responsible projects or initiatives in emerging markets, ranging from solar farms to forestry companies, and local lending institutions to IT platforms targeting largely unbanked workforces.

And while there are niche sources of data that meet some of the firm’s needs—such as the Integrated Biodiversity Assessment Tool (Ibat), ESG vendor RepRisk, environmental-focused supply-use database Exiobase, location-specific risk database ThinkHazard, and land protection data provider LandScope—there are no ready-made and commercially available datasets that specifically cover the sectors in which it invests, says Kaisa Alavuotunki, head of impact at Finnfund.

There’s no end of capital seeking a sustainable home.

Richard Mattison, S&P Global

Instead, the firm largely collects and monitors its own data from companies and local sources before and during an investment, which can involve on-site visits and detailed sustainability assessments, and creates its own risk ratings—from A to C, where A is the most risky—for any investment.

To validate social and governance elements in regions where high percentages of the population may not be able to read or write, the firm has also worked with Helsinki-based Work Ahead, which specializes in surveying the sustainability credentials of companies, to develop a video tool that can be used by employees of the companies being funded to describe working conditions.

“We can have primary information from a company, but we also need to verify that information. We can never rely on just one source of information,” Alavuotunki says.

… And boxed up again

Ultimately, data vendors will likely find ways to capture some of these more esoteric factors and package them up as integrated features within their existing ESG offerings. And considering the growth projections for ESG-related assets under management, demand for ESG data—and for ESG data providers—looks set to continue.

“I can only imagine there will be more M&A activity as this becomes more important and as more large companies decide to buy their way into ESG data versus building their own offering,” EDMC’s Bigelsen says.

And so far, the industry seems broadly in favor of more tie-ups between ESG data providers and traditional data vendors because of the potential benefits of being able to fulfill all their ESG data needs at a one-stop shop that delivers it ready-to-use and saves them the heavy lifting of integrating it with traditional datasets.

At least, that’s the case for now. If vendors hike the price of ESG data without delivering proportional value, consumers might turn elsewhere. And that’s the good news about this dynamic and rapidly evolving space: No matter how much M&A activity goes on, it’s so broad that there will always be startups with a new take on some element of ESG that can deliver value for investors.

After all, if the analyst numbers are anywhere near correct, as S&P’s Mattison says, “There’s no end of capital seeking a sustainable home.”