Keeping the analyst at the heart of ESG analysis
Environmental Finance: The market for ESG data is in flux.What is Ethifinance’s approach to ESG data collection and analysis?
Julia Haake: Ethifinance has been around for 20 years, and we now have 160 employees focused on ESG and credit ratings. We’re covering a universe of 2,300 European companies, primarily small- and mid-caps, for which we track around 140 ESG indicators.
However, once we’ve carried out the data collection process, we undertake dialogue with the companies we rate. This is particularly important given our universe, as publicly disclosed data is not so readily available for smaller companies. So we systematically reach out to all of the rated companies, share with them the data we’ve collected and invite them to provide additional information. Once we have all the data collected, we undertake a quality review, and flow the data into a model to produce our ESG scores.
EF: What would you consider to be the appropriate balance of automated scoring and the input of qualitative analysts?
JH: There is a tendency in the market to automate data collection and scoring to the maximum possible to ensure the profitability of ratings providers. This is a continuation of the trend to cut costs by outsourcing analysis to developing countries. Everyone’s got to look out for their business model, but we find that many clients want to see more human analysis in the deliverables they receive.
This is important because there can be problems with the quality of the data, whether due to errors in the datasets or to estimated data, and ESG analysis is about more than quantitative information. It can be about the overall feeling that an analyst gets when talking to a company, and their ability to understand its specific business model. We’re responding to demand from our clients with a new methodology that we’ll be rolling out next year. First, it’s going to be aligned with reporting required under the EU’s Corporate Social Responsibility Directive (CSRD) and we’re adding granular sector information. Secondly, we’re also integrating our view on the products and services provided by the company: what is its main business model and is it sustainable? Is it aligned with the UN Sustainable Development Goals and the EUTaxonomy, and so on. Basically, we’ll have a viewpoint not only on how the company manages the ESG risks in its operations, but also what its impact is on sustainability.
EF: What about how you present the analysis of ESG performance?
JH: In addition to ESG scores, we’re adding analyst opinions and analysis of the sustainability performance, and explanation of how we get to the ESG score. We will produce qualitative analysis on various aspects, such as the company’s climate transition – if there’s a climate transition plan and, if not, the targets, pathways and the technologies chosen by companies.
EF: What about AI in that context? Do you see a role for that in future?
JH: AI is moving very fast. If you build the right models, and have good input data, then perhaps AI will be of help in future. But, for now, what we’re trying to do is talk to companies and get their specific feedback. That’s more about human dialogue.
EF: Is regulation of corporate reporting moving fast enough, and in the right direction?
JH: Obviously, CSRD is a big change. We’re very happy and excited about this common standard for corporate reporting that, eventually, 50,000 companies will be using. But, as with many sustainable finance-related regulations, it’s very complex and represents a cost and a burden for companies. Perhaps the European Commission could have started with a simpler framework, especially for companies that aren’t already reporting. But we’re moving in the right direction.
EF: Finally, how do you see the market for ESG data evolving? What are you focused on at Ethifinance in that regard?
JH: There’s a lot going on in the market, with technology and AI continuing to shape the field, as will mandatory reporting initiatives. As a result of these forces, I think we’ll see faster evolution in this space over coming years.
In terms of what we’re focused on, we’re continuing to look for M&A opportunities to develop on the technology side and grow our business. But, for now, our main focus is on the evolution of our methodology, and to continue to deliver high quality data to our clients.
Julia Haake is Managing Director and Global Head of ESG Ratings Agency at Ethifinance, in Paris. Email: julia.haake@ethifinance.com
