9.2 The Interconnection of ESG and ESG Data
Environmental, social, and governance (ESG) issues are closely interconnected and mutually influence each other. This interconnectedness is based on the fact that corporate decisions and activities invariably affect multiple dimensions simultaneously, and sustainable outcomes can only be achieved if all three aspects are taken into account. The integration and joint consideration of ESG issues is essential for the following reasons:
- There is an interdependency between ESG factors: Decisions in one ESG area have both direct and indirect impacts on the other areas. For instance, environmentally friendly technology may not only provide ecological benefits but also have social (e.g., job creation or loss) and governance implications (e.g., regulatory compliance). If companies consider only one area in isolation, they may overlook potential risks or fail to seize opportunities.1
- A holistic approach to risk management is recommended: An integrated approach to ESG issues enables more comprehensive risk management.2 Environmental risks, such as climate change, can have substantial social and economic consequences. By adopting a holistic analysis, companies can be better prepared for future challenges and enhance their resilience.3
- It contributes to long-term value creation: Sustainable corporate governance that incorporates all ESG aspects supports long-term value creation. Companies that operate in an environmentally conscious manner, fulfil their social responsibilities, and maintain sound corporate governance are perceived more positively by stakeholders, including investors, customers, and employees. This can result in a stronger reputation, increased customer loyalty, and more stable financial performance.4
By recognizing the interconnectivity of ESG issues and addressing them together, companies can act sustainably and responsibly. This not only contributes to a better world but also enhances competitiveness and supports long-term business success.
Corporate ESG data refers to factors that are intended to make the sustainability of investments or companies measurable. The collection of raw ESG data stems from company publications (self-disclosure), standardised reporting (mandatory reports and voluntary frameworks), news and media, NGO reporting , company assessments (due diligence questionnaires) or internal models that use statistical models to fill in missing or distorted data. Once cleansed, the data can be used to calculate ESG indicators. These indicators are in turn grouped and assigned to various ESG themes, such as biodiversity or human rights, which are categorized under the three pillars of environmental, social, and governance.5
The ESG themes used to rate companies can vary significantly depending on the rating agency and methodology used.6 The following chart lists the most frequently used ESG themes used by leading rating agencies such as Bloomberg, MSCI or LSEG (formerly Refinitiv / Thomson Reuters):7
ESG data can present challenges, as illustrated by the following excursus.8
Excursus: The Challenge of ESG Data
ESG data collection, procurement, and quality face various challenges and barriers. ESG factors are often qualitative in nature, making it difficult to convert them into quantitative and aggregated data. Assigning scalable values to aspects such as a company's CO2 emissions, its adherence to human rights, or its executive compensation strategy, and subsequently evaluating these values, can be particularly challenging.9 Additionally, uncertainties regarding time horizons, intensity, and frequency complicate the quantification of environmental or social risks.10 Another challenge lies in the classification of ESG themes. From an external corporate perspective, this classification is often opaque, and it is not always clear which specific aspects fall under which pillar of sustainability (see Figure 1). Environmental and social issues are frequently complex and interconnected. For example, the supply chain can be seen as a social issue when assessing whether suppliers respect human rights. At the same time, it may also be considered an environmental issue if the goal is to measure a supplier's environmental footprint.
1 Porter & Kramer, 2011
2 Refer to, for example, the discussion on Enterprise Risk Management (ERM) in Lütolf et al., 2018.
3 WEF, 2019
4 Eccles et al., 2014
5 Roncalli 2024, p. 59-61
6 Berg et al. 2022
7 Bloomberg, online; LSEG, online; MSCI, online
8 Own illustration based on the rating agencies Bloomberg, MSCI, and LSEG
9 CFA Institute, 2015
10 CISL & UNEP FI, 2014