Are the Best Days for ESG Data Providers Behind Them? – ESG Investor

Oct 25, 2024

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I started my career in responsible investment in 2018, joining Trucost — a provider of environmental data and insights. The company had recently been absorbed by S&P Dow Jones Indices. This acquisition marked one of the early moves in a rapid wave of consolidation within the ESG data industry. ISS gained control over Oekom in 2018, and Vigeo Eiris and Four Twenty-Seven were integrated by Moody’s in 2019. MSCI then followed suit by taking over Carbon Delta, building on its early acquisition of RiskMetrics in 2010. The trend probably culminated in 2020 when Morningstar completed the acquisition of Sustainalytics.

The market for ESG data and analytics has since grown into a multi-billion-dollar industry, fueled by an expanding web of sustainability disclosure regimes, and the exponential growth of ESG integrated and sustainability-labelled funds, ETFs, and other indexed financial products. Data providers are reaping the fruits of those strategic acquisitions. Over the past five years, ESG and climate products have been MSCI’s fastest-growing revenue segment, contributing 11.4% of total revenues in 2023 (US$287 million), with this data also feeding into their US$1.4 billion index product line.

However, after experiencing explosive growth in recent years, ESG data providers now find themselves at another inflection point. The market for ESG data solutions seems to have reached a certain level of maturity akin to the third stage of an S-shaped growth curve. As the market enters this phase, sustaining high revenue growth rates will become more challenging. MSCI’s results provide a compelling case study of this evolution — after peaking at 50% in the first quarter of 2022, ESG and climate revenue growth rates steadily declined to 27% the following year, and 12% year on year in their latest quarterly results.

Several headwinds coincide with this slowdown in growth, precipitating the arrival of this inflection point earlier than ESG data providers may have anticipated. For instance, Russia’s invasion of Ukraine in February 2022 sparked a global energy crisis and triggered a surge in oil and gas prices, fuelling record profits for the industry. Energy companies capitalised on these earnings by completing share buybacks and increasing dividends. This in turn rewarded investors with strong returns in an otherwise dismal stock market, undermining sentiment towards ESG.

The political pushback against ESG in the US also contributed to the polarisation of the debate on responsible investment practices. Most notably, anti-ESG campaigns led by figures such as Florida Governor Ron DeSantis and Texas Governor Greg Abbott in 2022 led to congressional inquiries into investment managers — accusing them of violating anti-trust laws when entering investor coalitions such as Climate Action 100+, and advancing political agendas when marketing ESG investment products. This backlash caused many investment managers to abandon or tone down their responsible investment commitments, which may have severely undermined the growth in demand for ESG data products in the US. In the second quarter of this year, investors pulled US$4.7 billion from US sustainable funds, making it the seventh consecutive quarter of outflows. This is a market that ESG data providers would have had high hopes for, with expectations of volume and regulatory-driven growth — a prospect that now appears increasingly uncertain.

These headwinds, combined with inflationary pressures and continued high interest rates, may have created the perfect storm which prompted ESG’s early fall from grace. However, such exogenous factors and cyclical pressures should be separated from some of the more structural challenges that ESG data providers will face going forward.

For one, selling additional ESG data products in historically strong growth markets like the EU has become increasingly difficult. This reflects the normalization of responsible investment activity following five years of rapid growth, during which nearly every asset management firm rushed to acquire ESG data to comply with regulatory requirements and launch sustainable investment products. Some of the larger managers in particular, built their ESG data infrastructure by constantly adding datasets from a range of different providers to achieve the broadest possible coverage.

Managers are now more tactical in their approach to product launches. As responsible investment strategies are becoming increasingly sophisticated, data consumers have also become far more selective and directive in their data usage. They now prioritise specific use cases, such as deeper climate physical risk data, coverage for private markets, and solutions tailored for fixed income and alternative strategies. However, these solutions are more expensive to develop, and face less demand in today’s market, resulting in a more costly and fragmented product line for ESG service providers.

Leading investment managers have also increasingly developed their own proprietary ESG assessment and scoring methods, moving away from buying off-the-shelf products with black-box methodologies which they often struggled to understand and operationalise within their investment process. Ironically, many managers built out their ESG research teams precisely by onboarding experienced ESG research analysts from the very data providers they worked with.

Moreover, as company disclosures have increased and the number of ESG providers has grown, ESG data has become increasingly commoditised. S&P Global started to provide free access to ESG scores on its website in 2021. MSCI followed suit by also letting their Implied Temperature Rise Tool for Investors freely available online. More recently, the Net Zero Data Public Utility (NZDPU), a global open repository for climate transition data, and CDP, the independent environmental disclosure platform, announced in September 2024 that CDP would become the foundational global data provider for the NZDPU. For the first time, core climate data, such as GHG emissions and emissions reduction targets, from over 10,000 companies — representing more than 50% of global market capitalisation — will be available to download for free in 2025.

Beside privately-led initiatives to develop open-source platforms to exchange ESG data in a harmonised way, we also see the European Commission pushing forward with its plan to launch the European Single Access Point (ESAP). Expected to launch in 2027, ESAP will serve as a direct access point for ESG and financial data in machine-readable form. Companies will need to provide annual financial statements, management reports, and, once the Corporate Sustainability Reporting Directive (CSRD) is phased in, sustainability reports with details on the EU Taxonomy.

Are the best days for ESG data providers behind them? Having initially positioned themselves as gatekeepers in the sustainable finance ecosystem, data providers were able to reap the low-hanging fruits of ESG’s exponential S-shaped growth phase. But as the market has matured, and as regulatory rollouts in the EU fade, with possibly no significant regulation in the US, they may have started to experience the early days of a structural decline in growth.

One thing is certain, however: the ESG industry is here to stay. The market continues to grow significantly, primarily driven by investor demand. Delays to the phase-in of CSRD reporting and mandatory ESG data assurance also mean that data providers still have a critical role to play in verifying, standardising, and bridging data gaps. Moreover, the implementation of the final recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) and the development of new ones by the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) may create another inflection point for the industry.

Perhaps, after all, data providers have not yet reached their sea of tranquillity.

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