ESG data is becoming embedded within financial institutions across risk and asset management as investors and consumers alike want businesses to do more about issues such as climate change, diversity, equality, and inclusion (DE&I).

Data management solutions such as Data-as-a-Service offerings are helping firms to obtain the ESG information they need and is providing a foundation for their end-to-end investment management processes on which they can build – for asset allocation, regulatory reporting and client reporting alike.

In this article we review how the interest in sustainable and impact investing remains high and has become an increasingly important part of the investment process. While also looking at how there is heightened demand for ESG data integration in the global financial market sector.

The Demand for Impact Investing

PWC reports 75% of asset management firms say investor demand plays a significant or very significant role in the firm’s ESG focus. This is unsurprising considering 77% of institutional investors are planning to stop buying into new non-ESG products by as early as 2023.

Asset managers are therefore working hard to integrate ESG considerations into new and existing funds. The investor-led demand is expected to drive a 27% CAGR in ESG-based AUM through to 2025, at which stage 1/3 of projected global AUM is expected to be allocated to ESG oriented funds.

ESG-committed funds are very popular across alternative asset classes with infrastructure (64% by total class AUM) and private debt funds (59% by total class AUM) recording the highest ESG commitment rates, and Private Equity recording the lowest commitment rate at 34% by AUM.

Given the strong demand from investors and the significant headroom for ESG-fund growth we expect a very strong growth trajectory for the companies providing ESG related products.

ESG Data Integration into Financial Information

Early ESG data providers to financial institutions served only to act as an additional source of information during the decision-making process. Now ESG data is increasingly integrated into financial performance and outlook information.

No overarching consensus has been reached regarding whether ESG assets offer better returns in the long run, although many of such assets may not have been ‘stress tested’ by coming policy changes or severe climate events. However, the demand for impact investing is incentivizing asset managers to make the best investments with ESG as a key consideration.

Further, the Climate Risk Management subsector of the ESG market also aims to quantify the risks related to climate change (environmental), natural disasters (physical), or government policy changes (transition) and make the correct adjustments to the pricing of assets.

Kevin O’Neill, Goldenhill International Partner, and M&A Advisor in the ESG sector says:

ESG data analytics and collection technology is growing in sophistication. As the ESG market grows so too will data quality and scope.

ESG Data and Financial Integration M&A

There has been significant M&A activity in this market over the last 2.5 years, attracting many large strategic acquirors such as S&P Global and Morningstar (Sustainalytics) and notably Moody’s who made the $2bn acquisition of Risk Management Solutions – the market leader in Catastrophe Risk Management Solutions.

Within the industry some companies are also focusing on becoming vast ESG databases where thousands of companies can be measured like-for-like across the same set of criteria. ESG Book is a market-leader in this area, covering 450+ metrics across 25k companies. It successfully raised $35m from a Series B round led by Energy Impact Partners in Q2 2022.

Find out more about recent M&A activity in the ESG sector by viewing our latest ESG Report here.

Next Steps

ESG data integration solutions will continue to help financial organisations across the world to allocate funds efficiently for more sustainable outcomes, while also incentivizing asset managers to make the best ESG investments.

Goldenhill International is a leading M&A advisory service, for businesses and organisations within the ESG data and analytics sector. Get in touch with one of our specialist M&A advisors today, for an informal discussion about your M&A plans.