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Sustainability in the Capital Markets

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30 June 2020
Brad Bailey William Trout

Technology and Data Ecosystem for ESG

Abstract

Celent explores key trends, data sources, metrics, and partnerhsips in ESG. We look at the implications across capital markets, asset and wealth management of socially responsible investing (SRI) and its signifcant traction in recent years. The increasing awareness of global sustainability challenges, a regulatory and development agenda that has identified SRI as an essential antidote, increasing investor demand — particularly from millennials, who are more likely to invest in line with their environment or socially conscious views —and a belief that environmental, social, and governance (ESG) factors may enhance financial returns are some of the key drivers. This has led to a broad spectrum of responsible, sustainable, and impact investment strategies with varying degrees of ESG sophistication and a total of $30 trillion invested globally.

This interest in ESG has clear benefits for wealth and asset managers but has also led to various commercial opportunities for investment banks and other capital market participants:

·Advisory: integration of ESG with corporate strategy; ESG due diligence for mergers and acquisitions (M&A); etc.

·Financing: underwriting of green, transition, sustainable, and social bonds; sustainability-linked credit facilities; project finance; etc.

·Trading and hedging: trading of carbon allowances and offsets; hedging solutions such as corporate derivatives to mitigate transition risk and physical risk; etc.

The ESG market currently has a high number of data and analytics providers. Some of the key third party data and analytics vendors discussed are Refinitiv, Bloomberg, Beyond Ratings (LSEG), Factset, MSCI (Carbon Delta), Morningstar (Sustainalytics), Moody's (Vigeo Eris, Four Twenty Seven, Syntao Green), S&P Global (Trucost, RobecoSAM), ISS ESG, RepRisk, CDP, and 2 Degrees Investing Initiative.

Capital market participants frequently use multiple providers for ESG data and analytics. As the market continues to evolve, we expect continued consolidation via acquisitions and partnerships. Additionally, we anticipate a growing reliance on alternative data sources to complete and/or validate traditional data (i.e., company disclosures) and the development of forward-looking data sets and indicators.

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