www.synechron.

com

Mapping the ESG Landscape:

Complexities, Complications
and Considerations

Authored by:

Rajul Mittal
Head of Sustainable Finance
Synechron, The Netherlands

Bermet Dordoeva
Senior Consultant
Synechron, The Netherlands

Hachem Ohlale
Head of Analytics & Data Science
Synechron, The Netherlands
2 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 3

THE EVOLUTION 2001 2013 2016

OF ESG
US Index for institutional First global series ESG ESG +Factor indexes FTSE,
investors KLD Broad Market Fixed income indexes MSCI, Solactive, RobecoSAM
Sustainability index (now Barclays MSCI ESG
MSCI USA ESG Leaders Index) Fixed Income Indexes
FTSE4Good Indexes
2009 2018
1971 Bloomberg launched Previously known as
Launch of Pax World Fund, Bloomberg ESG Data Service Thomson Reuters
first socially responsible Financial & Risk, the
mutual fund in the US Launch of Sustainalytics unit was spun off and
rebranded as Refinitiv

1990 2000 2010 2020

1990 2005 2010 2011 Sustainalytics Synechron

acquired by launched
First ESG Index Term ‘ESG’ was first coined in a MSCI ESG The Sustainability Morningstar ESG Booster
MSCI KLD 400 Social Index landmark study ‘Who Cares Wins’ Research Accounting
launched Standards Board 2015
(SASB) is The Task Force on Climate
established related Financial Disclosures
Other events Year of establishment of various data providers
(TCFD) launched

The Industrial Revolution was the catalyst for not shareholder value was created. But those two was founded in 2011 to develop sustainability their sustainability matters in a standardized
only unprecedented scientific development, but worlds have since collided. accounting standards.ii That was followed by format in the coming years. Of note, ESG is being
also the onset of considerable CO2 emissions. the 2015 launch of the non-profit Task Force on considered not only for long term risk mitigation,
Cumulative greenhouse gases emissions over In 1990, the very first US ESG index was born, Climate-related Financial Disclosures to promote but also for proactive alpha generation. We
the last couple of centuries have led us into a followed by the creation of the first global climate-related exposures and advance market expect the integration of ESG to grow further
time where the world needs to focus on a wide ESG index nine years later in 1999. In 2004, transparency and stability.iii In the last five years within the global financial industry at a

“
and growing array of Environmental, Social the former UN Secretary General Kofi Annan we have started to see unprecedented attention considerable pace.
and Governance (ESG) issues. ESG concerns wrote to more than 50 CEOs of major financial to ESG by various financial market participants.
are central to the larger Sustainable Finance institutions, inviting them to participate in a
movement itself which has become mainstream joint initiative whose goal was to find ways to Starting with EU Taxonomy, which was
in recent years. integrate ESG metrics into capital markets. The adopted in July 2020, the European Union is ...ESG is being considered
term “ESG” was coined in 2005, as part of this continuing to build a solid regulatory base to
The first, early iteration of ESG, in concept, dates initiative, which included the release of the report make sustainable finance work. Sustainable not only for long term
back to 1960. That was followed by the 1971 “Who Cares Wins”.i It stated that embedding ESG Finance Disclosure Regulation (SFDR) came into
launch of the very first mutual fund, the Pax
World Fund, dedicated to then-called ‘socially
factors into capital markets makes good business
sense and leads to more sustainable markets
force in March 2021, followed by the review of
Non-Financial Reporting Directive (NFDR) and
risk mitigation, but also
responsible investing’. That definition has
evolved over the years, with both exclusionary
and better outcomes for societies. a proposal to widen the scope for disclosures
to SMEs (Corporate Sustainability Reporting
for proactive alpha

”
and inclusionary investing mandates in focus. Up Demonstrating progress toward taming the Directive) in April 2021. These changes will
until about 1990, few took notice of the climate growing datasets and disclosures, the non-profit bring more data into the ambit of ESG, since generation.
impact as long as the economy was thriving, and Sustainability Accounting Standards Board more and more companies will have to disclose
4 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 5

THREE PILLARS
TO A BETTER WORLD

Defining the three pillars Why does ESG matter, anyway?

The global industry currently recognizes three ESG is becoming an important part of the risk • Green Bonds – The so-called ‘Green Bond’
pillars that constitute ESG as a set of metrics. framework in financial institutions.v Mitigating market has ballooned from US$36 billion in
These are the array of criteria that help measure ESG investment risks and transition to a 2014 to US$257 billion in 2019.
and decide what falls within the sustainability sustainable economy are viewed as key drivers Coming next: Social, Sustainability, SDGs,
universe for businesses. There is a strong link for ESG adoption. Moreover, mitigating ESG risk and Transition bonds
between ESG metrics and the 17 UN Sustainable in a portfolio is a significant consideration for
Development Goals (SDGs) – adopted by all UN institutional investors. These drivers are backed • Retail Investing – More than one-half of
Member States in 2015.iv up by a Harvard Law School surveyvi which millennials and GenZers prefer sustainable
found that nearly one-half (46%) of institutional products.
• Environmental factors include carbon investor respondents said they view ESG as a Coming next: More sustainable investing
emissions, efficient use of water and energy, fiduciary duty, and an equal percent felt they products for retail investors
waste management practices, and other must meet/get ahead of regulation, while a still
items related to climate change sizeable 44% of respondents said their goal is • Impact Investing – More than 1,720
to mitigate ESG risk. What’s more, this survey organizations managed US$715 billion in
• Social factors focus on how a business found that institutions with more mature ESG impact investments in 2019.
impacts & interacts with society. Key policies in place are more heavily influenced by Coming next: Impact measurement practices
social factors are supply chain and product global initiatives, such as those of the United are expected to mature vii
responsibilities, human rights issues, labor Nations- supported Principles for Responsible
laws etc. Investment or the non-profit Sustainability • Sustainable Borrowings – The
Accounting Standards Board (SASB) framework. Sustainability-linked borrowing/loan market
• Governance factors include shareholder is growing at a rapid pace.
rights, the corporate board of directors We firmly believe that the best use of ESG data Coming next: Sustainability-linked
including gender equality/representation, is to facilitate change and make the impact target setting is becoming science based,
and the company’s compensation policies measurable. This has also been manifesting in transparent and comparable
several ways across the investment ecosystem,
and we foresee ESG linked investment
opportunities blossoming:
6 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 7

CHALLENGES TO
FURTHER ESG ADOPTION

What are the challenges to The key questions then become:

“ One of the biggest challenges is not
further ESG adoption by
• What is ‘sound’ data?
• What data should we use?
that we are seeing more and more ESG
institutional investors? • How can we make sense of it?
• How do we perform appropriate analysis?
data providers, but that ESG data lacks

”
According to the Harvard Law School survey
previously mentioned, 44% of institutional
Understanding the differences
consistent methodology and structure.
investors said the lack of reliable or consistent
ESG research/data is the biggest barrier for their among third-party data providers
organization in accelerating ESG adoption.
Third-party ESG data providers are quite
As of 2018, 85% of S&P 500 companies were divergent in terms of criteria, definitions, asset
generating Sustainability Reports, versus coverage, regional or global coverage, industry-
only 20% in 2013.viii A 2020 report from the specific coverage and other factors. This results
Governance & Accountability Institute observes in differences with respect to ESG data, scores,
that as of 2019, that number had risen to 90%.ix ratings, and rankings, which can be daunting to
Currently, ESG data sources include: sort through and understand.
• Annual reports/sustainability reports
• Company websites Key differences among third-party data
• NGO & government reports providers:
• Stock exchanges
• News and social media • The type of data used – current and/or
• Third-party data providers historical and the quality of data used
• The methodology deployed – toward
Abundance of inflowing data should make ESG assessing data inputs, such as to weightings/
evaluations easier. However, while a plethora of indicators
data is available, that data is highly fragmented, • Coverage area analysis – across different
is found in differing formats and languages, asset classes/global markets
and primarily available as unstructured data. • Scale and frequency of analysis – including
Additionally, self-reporting is often suspect, once per year versus quarterly, versus in-
as reporting and underlying data is not under real-time analysis, risk scoring, range and
regulatory scrutiny nor audited. “Greenwashing” depth of analysis
– where a company deceitfully reports
environmental practices/initiatives, or attempts Lack of standardization and comparability
to ‘spin’ what it does, or even ignores negative with respect to ESG data makes genuine
events altogether – can be problematic as formal insights difficult to obtain. Synechron classifies
audits are currently absent. A 2019 ESG study third-party ESG data providers into four main
of EU based asset & wealth management firms categories.
found that only 13% rely on their in-house data.
8 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 9

CATEGORIZATION OF
DATA PROVIDERS

1 2
Globally focused Traditional market
data providers data providers
Global ESG data providers having a wide Traditional providers of market data that
coverage in terms of geography, asset class, etc. also include ESG as one of the service offerings

3 4
Niche ESG analytics
data providers platforms
Data providers having a niche approach in terms Data and technology providers of analytics
of coverage and/or input data feed platforms that often make use of third-party data

What makes comparing data such • The divergence can dampen the ambition
of companies seeking to improve their ESG
a difficult task? performance, thanks to the mixed signals
they receive from ratings firms
As confirmed by a study conducted at the MIT
Sloan School of Management, ESG ratings
• Main factors contributing to divergent
diverge substantially across the major data
ESG rating are namely differences in terms
providers.x Contributing factors include:
of measurement technique (50.1%), scope
(36.7%) and weight (13.2%)
• Corporate stock and bond prices are
unlikely to properly reflect ESG performance
• Lack of consistency and conformity for
as investors struggle to accurately identify
credible comparisons across data sets. As
out-performers and laggards
a result, some companies avoid disclosing
information that could potentially cast them
in a negative light
10 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 11

ESG DATA
PROVIDERS

Looking across some of the

mainstream ESG data providers,
differences are clear
In line with other studies, Synechron has found a
lack of consistency among how corporate ESG data
is collected, analyzed, ranked/rated/scored and
presented.

Furthermore, Synechron’s targeted outlier analysis

of 82% of S&P 500 companies, based upon data
from two leading ESG data providers found the
following.
The outlier score is depicted as a percentage
showing the difference between normalized ESG
scores across data providers based on industry level
ranking scale:

• 11% of the companies got a high score

• 48% of the companies got a moderate score
• 41% of the companies got a low score

Our research showed that S&P 500 companies with

a high (11%) and moderate (48%) outlier score
showcased significant differences in ESG ratings.
12 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 13

ADDRESSING
THE CHALLENGES

What can you do to address these 1. Diversify the collection of ESG data sources 3. Prepare for regulatory impact and data • News-based sentiment analysis feeding into
and focus on data quality & granularity changes ESG
challenges? • Social media data translated into ESG signals
Two types of ESG datasets are available on Requirements from Sustainable Finance • Knowledge graphs to detect related ESG
There is no doubt that the ESG data landscape
the market: first, “inside-out” (company self- regulations (EU Taxonomy, SFDR, and NFRD/ controversies alongside supply chains
is constantly evolving. Currently there is no
reporting via sustainability and annual reports) CSRD, etc.) all emphasize transparency and data
convergence in terms of ESG standards. For now
and the second, “outside-in” (external third- quality. A streamlined data collection, reporting, 5. Cater to the needs of your audience
the best strategy to move forward is keep a tab
party’s views toward companies’ ESG, i.e., ESG analysis, storage, and product design can ease
on the market and align accordingly.
ratings, and news/media sentiment analysis the upcoming regulatory burden and unlock the Given that the topic of ESG is overarching and
scores). A fine balance between these two types new set of possibilities for businesses. covers a variety of stakeholders, a wide range of
The bottom line is that there is no one-size-fits-
of data will maximize the value of ESG and give a expertise is required to fulfill their diverse needs.
all solution. Most of our clients are now starting
better understanding of what companies say and 4. Invest in Data & Analytics capabilities to For example, expertise around data visualization
to explore which ESG data provider to use.
what they actually do. harness the full power of ESG data can come in handy to be able to communicate
Relying on third-party data, news data only, or
ESG data-driven insights in an understandable
self-reported data each approach has its own
2. Take a deeper dive for granularity Organizations need to have a clear ESG data manner to a wider audience including
benefits and drawbacks.
strategy in place to collect data from various management.
ESG is a good proxy when talking about sources based on their business needs. This
At Synechron, we believe there are certain key
sustainability, but ESG covers many sub-issues should be expanded and enhanced with strong 6. Build up your ESG capabilities in parallel
tenets that should be embraced as we move
and can vary per sector and even per company. data management and governance capabilities with the growing investment trend and
towards a more reliable and standardized ESG
ESG data analysis should go one level deeper to ensure ingestion, management, processing, satisfy/attract customers
data landscape:
to different parameters which are material for security, governance and lineage of ESG data.
the companies’ core business. More granularity Provide adequate ESG trainings to existing
on ESG data, such as GHG emissions and Investment in analytics & data science employees undertaking a variety of roles
female/male ratio at the board level, provides capabilities is crucial as the complexity of ESG i.e. investor relationships, procurements,
a comparable basis among the companies and data is growing rapidly. For example, machine and portfolio manager. Educating various
pointers for improvements. learning and natural language processing are stakeholders including clients with respect to
essential to be able to get proper insights based ESG is important to accelerate the
on collected structured and unstructured data. sustainability shift and ensure the right
This includes techniques like: uptake of ESG based products.
14 Mapping the ESG Landscape: Complexities, Complications and Considerations www.synechron.com 15

About Synechron Resources

Synechron is a leading digital transformation consulting firm focused on the financial services i
https://d306pr3pise04h.cloudfront.net/docs/issues_doc/Financial_markets/who_cares_who_wins.pdf
industry and is working to Accelerate Digital initiatives for banks, asset managers, and insurance ii
https://www.sasb.org/about/
companies around the world. Synechron uniquely delivers these firms end-to-end Digital, iii
https://www.fsb-tcfd.org/about/
Consulting and Technology capabilities with expertise in wholesale banking, wealth management iv
https://sdgs.un.org/goals
and insurance as well as emerging technologies like Blockchain, Artificial Intelligence, and Data v
https://www.fitchratings.com/research/fund-asset-managers/nascent-social-bond-fund-sector-faces-implementation-challenges-14-12-2020
Science. Based in New York, the company has 22 offices around the globe, with over 10,000 vi
https://corpgov.law.harvard.edu/2020/01/13/into-the-mainstream-esg-at-the-tipping-point/
employees producing over $650M+ in annual revenue. For more information on the company, vii
https://thegiin.org/assets/GIIN%20Annual%20Impact%20Investor%20Survey%202020.pdf
please visit our website or our LinkedIn community. viii
Raising the Bar on ESG Data Integration, 2019 – TrueValue Labs
ix
2020 Flash Report S&P 500, June 16, 2020 – Governance & Accountability Institute, Inc.
Synechron has created ESG Booster, one of the innovative business solutions that are part of our https://www.ga-institute.com/research-reports/flash-reports/2020-sp-500-flash-report.html

InvestTech Accelerator program. This suite of digital tools were built to address the specific needs x
Why ESG ratings vary so widely (and what you can do about it), August 26, 20189 -- MIT Sloan School of Management

of buy-side industry financial services firms, including wealth managers, asset managers, private https://mitsloan.mit.edu/ideas-made-to-matter/why-esg-ratings-vary-so-widely-and-what-you-can-do-about-it

banks, pension funds and insurance companies. Our ESG Booster helps our clients facilitate an
ESG-based portfolio overview to: Additional Resources:
• normalize different ESG ratings, ranking, and scores Getting Started in Sustainable and Impact Investing: A Guide for Retail Investors -- The Forum for Sustainable and Responsible Investment (US-SIF)

• achieve better portfolios without compromising financial performance https://www.ussif.org/howdoisri

• engage with portfolio companies on ESG issues at a granular level GIIN Annual Impact Investment Survey 2020
• predict the ESG impact towards portfolios based on news sentiment analysis https://thegiin.org/assets/GIIN%20Annual%20Impact%20Investor%20Survey%202020.pdf – Global Impact Investing Network (GIIN)

To learn more about Synechron’s perspective on ESG data analysis or to talk to us about Sustainability-Linked Debt Ties Borrowers to ESG Goals -- Fitch Ratings Report
https://www.fitchratings.com/research/fund-asset-managers/nascent-social-bond-fund-sector-faces-implementation-challenges-14-12-2020
potential solutions to up your ESG game, reach out to: [email protected].
Aggregate Confusion: The Divergence of ESG Ratings, May 17, 2020 – MIT Sloan School of Management: https://poseidon01.ssrn.com/delivery.php? ID=575102124071
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