Is the ESG data gap in fixed income a misperception?
Published
March 2023
It is not uncommon to come across discussions of how a lack of relevant data is challenging ESG integration efforts in financial markets. These discussions continue despite increasing disclosures by companies and the great strides made by data companies in recent years in this area. There is now extensive Environmental (in particular climate - both physical and transition), Social Impact and Governance data available globally across multiple asset classes, but some of these data sets may be largely unknown to investors and asset managers.
In light of the increasing availability of ESG data, where is this misperception regarding a lack of relevant data coming from, and how widespread is it? With these questions in mind, we asked Coalition Greenwich to conduct a survey of major fixed income asset managers globally in order to obtain real world feedback. See here for full survey results.
Between July and August 2022, Coalition Greenwich conducted interviews with 111 well-established buy-side fixed income professionals globally to understand and gain their views on the importance of ESG in investment decision-making, how their firms are incorporating ESG factors into investment frameworks, and the biggest challenges they face in doing so.
ESG important, but more data needed
The survey showed that 90% of respondents agree ESG data is important to help in the fixed income decision-making process, with over half of all respondents stating that ESG data is “very important” (see Figure 1 below). This suggests ESG factors may be gaining in prominence alongside traditional financial valuation and performance related criteria in fixed income markets, at least amongst the respondents to the survey.
Importance of incorporating ESG in decision-making process
Source: 2022 Coalition Greenwich Market Structure & Trading Technology Study. Based on 48 respondents.
In addition, the survey results showed that fixed income asset managers could be looking for additional data and products to allow them to integrate ESG more fully into their investing framework. Nearly 85% of respondents said they are looking for “more capabilities” , while almost half of the respondents felt there is a lot of “room for improvement”.
Surprisingly, approximately three quarters of the investors in private credit and debt, in particular corporate syndicated debt, that participated in the survey expressed the view that more ESG data was needed. However, in our experience, ESG data and related products are readily available across fixed income segments. Let’s walk through a few examples of how ESG data can be applied:
- ICE Sustainable Finance climate and ESG data coverage is available for approximately 3 million fixed income instruments including corporate bonds, municipals, sovereigns and money markets across North America, Europe and Asia. In the U.S., data is available to provide transparency around climate and ESG issues for 95% of the Mortgage-Backed Securities (MBS)universe.
- Availability of emissions data for 300,000 securities linked to corporate entities that can be expanded to private equity and linked to the millions of aforementioned fixed income instruments.
- ESG data has many capabilities
Helping you assess climate transition risk, to assisting with identification of portfolio exposure to assessing physical risk hazards like wildfires, floods and hurricanes.
Assisting with analysis of the social impact of municipal and mortgage-back securities portfolios.
UN Sustainable Development Goals (SDG) alignment of municipals.
ESG data a challenge?
Another interesting section of the survey relates to the challenges and obstacles fixed income managers feel they face when attempting to integrate ESG data into their frameworks. Two of the top three obstacles cited by asset managers in the survey are directly related to data availability and data quality. Forty-six percent of overall respondents stated that there is a lack of relevant data, and that this is the main obstacle in incorporating ESG.
Top obstacles in integrating ESG in fixed-income portfolios
Note : Based on 111 respondents.
Source : Coalition Greenwich 2022 Market Structure & Trading Technology Study
According to respondents of the survey, ESG data availability is especially a concern for municipal bond and GSE investors, 64% of whom cite the lack of relevant data as the top concern.
We find this view particularly interesting given municipal and government sponsored enterprise (GSE) securities are the types of securities where ESG data, and especially climate related data, is readily available. The ICE Climate Physical Risk Data, for example, provides extensive physical risk climate data and metrics (heat stress, wildfire, flooding, hurricane and drought) with CUSIP-level coverage of ~98% of the ~$4T in outstanding municipal debt and ~95% coverage of the U.S. MBS universe.
Looking ahead
As we look to the next three years, the top two priorities of survey respondents were to improve reporting to stakeholders and extend ESG themes to the entire investment lifecycle. In order to achieve such goals, participants in the fixed income markets will require access to ESG data.
Top strategic ESG investing initiatives over the next three years
Source: 2022 Coalition Greenwich Market Structure & Trading Technology Study. Based on 51 respondents.
Raising awareness
Overall and on the basis of the survey results, we are encouraged by the extent to which participants in the fixed income markets view integration of ESG data into their investment decision-making process as important and cite the need for additional data and products to achieve this goal. However, of surprise to us are the securities, where respondents cited a lack of data as a challenge, specifically municipal and government-sponsored entity, and private credit and debt, as we view these areas as currently best served by ESG data and financial products. Our takeaway, we have our work cut out to raise awareness on ESG data availability!