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Alternative Market Briefing

ESG data market worth to reach $1bn in 2021

Wednesday, March 11, 2020

Laxman Pai, Opalesque Asia:

The market for environmental, social and governance (ESG) data could reach $1 billion by 2021, said a research report.

Opimas report 'ESG Data Market: No Stopping Its Rise Now', says that the market topped $617 million in 2019. The research group projects annual growth of 20%, and 35% growth for ESG indexes.

The report states that the bulk of the buying will come from Europe. Roughly 60% of demand will come from European firms, primarily due to regulations. Asset managers must incorporate ESG considerations into their fiduciary duties by the end of next year.

North American firms will comprise 33% of demand. Asian companies will represent the final 7% of demand.

The biggest buyers of ESG data are asset managers, at 59%, followed by sell-side institutions at 19%, asset owners at 12%, others, including consulting firms and investment advisers, at 6%, and corporates at 4%.

While ESG data providers are using more sources to make ESG data more timely and reliable, Axel Pierron, Opimas managing director, and report co-author said incomparable data pose a risk.

"The issue ahead is that the industry is likely to see a massive reallocation of portfolios toward companies that have better ESG ratings solely based on incomparable data. Investors will end up with stocks that are overpriced due to - at best - incomplete or outdated data," Pierron said.

Until now, the industry has mostly focused on a quantitative approach, particularly with the use of ESG ratings that attempt to transform qualitative information into hard numbers, said the report.

As ESG integration and the corollary need for granular data continue to grow, ESG data providers should consider adding a qualitative layer on top of their quantitative data.

"We expect financial analysts, notably within sell-side institutions, to embrace ESG criteria in their company reports as they certainly have a role to play in enriching quantitative information within their qualitative research," said the report.

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