Part 1: State of play of the sustainability-related products and services market

EC research brief

In this first part, the contractor should provide an economic overview of the state of the development of the market for sustainability research and ratings, the number and type of actors, the market trends, the fees structure, the level of competition and identify possible barriers to entry.

The study should also describe whether some national and/or international rules including, but not limited to, legislative or administrative measures could apply to sustainability-related products/services providers.

In addition, it should include an analysis of existing market standards as well as any industry initiatives on self-regulation.

In addition, the contractor should provide a summary of the main constituents of these initiatives and analyse to which extent they are used by the market.

How big is the market for sustainable investment data, ratings and research?  Who has what market share?

  • EC interest: "The contractor should provide an economic overview of the state of the development of the market for sustainability research and ratings”
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What is the number and type of actors across the sustainable investment value chain?

  • EC interest: "The contractor should provide [details of] the number and type of actors [in the sustainable investment research market]”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

From research providers, we would like to know how many customers purchased SRI data, ratings or research from their firm in 2019.

What we (think we already know) => Context

We derive the number of and type of actors in the sustainable investment value chain from two sources:

  • PRI signatories - which gives a list of organisations that have made a public commitment to sustainable investment
  • SRI-CONNECT membership - which identifies organisations that have committed (human) resources to the area

Cross referencing these sources should give us the most accurate measure of industry size.

Type

Firms (on SRI-CONNECT)

Employees (on SRI-CONNECT)

PRI signatories

INVESTORS

 

 

 

Asset owners

118 firms on list here

194 individuals on list here

474 asset owner signatories (Jan 2020)

Investment consultants

107 firms on list here

188 individuals on list here

 

Asset managers

586 firms on list here

1,671 individuals on list here

1,915 asset manager signatories (Jan 2020)

RESEARCH PROVIDERS

   

311 service providers (Jan 2020)*

ESG ratings agencies

12 firms on list here

1,001 individuals on list here**

 

Sell-side brokers

31 firms on list here

108 individuals on list here

 

Credit ratings agencies

7 firms on list here

48 individuals on list here

 

Data providers

2 firms on list here

See ESG ratings agencies (above)

 

For impact or grant-funded research providers

7 firms on list here

See independent sustainability research providers below

 

Specialist research, engagement or data boutique

22 firms on list here

266 individuals on list here**

 

LISTED COMPANIES

 

 

 

Listed companies

529 firms on list here

870 individuals on list here

 

* Note: The PRI does not distinguish between different types of ‘service provider’ so this figure includes investment consultants, research providers, sustainability consultants and many other types of organization.

** Note: SRI-CONNECT does not distinguish between individuals that work for different types of independent sustainability research providers using the same categorisation as we have applied in this study.

*** Note ‘research’ and ‘markets & trading’

What are the trends within the market?

  • EC interest: "The contractor should provide an overview of … market trends”
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Outstanding questions

We have questions for research users and research providers about:

  • the changing demand patterns for sustainable investment strategies
  • the implications that these have for data, ratings and research
  • the most innovative recent research services and reports
  • what developments they would you most like to see in sustainable investment DATA, RATINGS OR RESEARCH in 2020?

What we (think we) already know => Context

There are four leading sources for information on the size and shape of the sustainable investment industry.

All of these studies report strong growth in sustainable investment in recent years - particularly in the last two years.  Specific trends noted in reach report are highlighted below:

Global Sustainable Investment Alliance

The major trends identified within the latest 2018 report were:

  • Whilst it remains the largest region for sustainable investing assets, the only region not to experience growth year on year was Europe. GSIA suggest the slight drop from 53% to 49% of total professionally managed assets may be due to stricter standards and definitions
  • Exclusionary screening remains the dominant strategy ($19.8 trn) followed by ESG integration ($17.5 trn) and corporate engagement/shareholder action ($9.8 trn)
  • Retail investors account for a quarter of all sustainable assets held, up from 11% in 2012
  • Just over half of all sustainable investment assets held are in public equities; the next largest asset allocation is fixed income which accounts for a third of all assets held

Eurosif

The major trends identified within the latest 2018 report were:

  • Exclusions, representing €9.5trn of AUM, is still the most prominent strategy in Europe, although did experience a slight drop in the study.
  • The trend for more active management continues, with solid growth of 7% CAGR from a high base (€4.9 trn) for engagement and voting.
  • ESG integration (€4.2 trn) was the fastest growing strategy with a CAGR of 27%, suggesting that integrating sustainability criteria within investment strategies is increasingly standard
  • Impact investment, although the smallest category at just over a trillion in AUM, has grown exponentially over the past 6 years at 52% CAGR, with the Sustainable Development Goals featuring prominently within the deployment of this strategy
  • The share of retail investors compared to institutional investors increased nine-fold, growing from 3.4% in 2013 to 30.7% in 2017.

PRI Reporting and Assessment process

The major trends identified within the latest 2019 report were:

  • The percentage of asset owner signatories considering responsible investment at all stages of selecting, appointing and monitoring managers increased from 59% to 62%
  • 96% of asset owner signatories having a mission, strategy or investment policy referencing responsible investment (or a related concept) that covers the majority of their AUM
  • 96% of signatories incorporate ESG issues in listed equity investments, whilst 83% incorporate these issues into other asset classes
  • 71% of signatories set clear objectives for their engagement, both individual and collaborative activities

IRRI Survey

The major trends identified within the latest 2019 report were:

  • 87% of asset owners require sustainability and corporate governance to be integrated into new mandates with a similar number requiring managers to report on how they incorporate sustainability factors for existing mandates
  • 2/3 of institutional investors surveyed publish a regular report on their SRI & corporate governance activity
  • On average SRI asset managers use two waterfront SRI/ESG subscriptions
  • Only 28% of asset managers, according to brokers, are clear about what they want from the sell-side and understand how to pay for it
  • More than half of asset managers rate data & research from independent providers as ‘critical’ or ‘significant’, research from sell-side is somewhat less important – just under half of managers rate it similarly. Third party services for engagement and client reporting are least valued

Implications for the development of data, ratings and research

Evidently the sustainable investment market is seeing significant growth globally, with strategies leading investors to engage with companies in which they invest and positively contribute to the sustainability of the business model showing the most growth. When choosing new mandates, a significant majority of asset owners require sustainability and corporate governance to be integrated.

These trends have the following implications for the provision of sustainable investment data, ratings and research:

  • The significant increase in overall AUM likely to be converted to sustainable investment will lead to a significant increase in demand for sustainable investment data, ratings and research
  • The trend for active ownership related to sustainability factors has positive implications for the demand for related sustainable investment research and ratings
  • The continued popularity of exclusion-based strategies will continue to support demand for sustainable investment data as investment managers implement basic ESG screening
  • The growth in ESG integration will lead to an increase in demand from all types of investors for stimulus sustainable investment research and integrated sustainable investment research.
  • The rising importance of the retail investor in the sector will potentially lead to greater scrutiny of how investment managers are meeting their strategy objectives (rather than green-washing)

These trends are summarized in the table below:

SRI strategy

Summarised trend

Research needs

Ethical-issue-based screening & weighting

Down (from a high base)

Data
Screening services

Environmental-issue-based screening & weighting (including climate change-based screening & weighting)

General decline in screening more than offset by growth in climate-changed based screening & weighting

Data
Screening services

Best in class

Marginally up (popular in France)

ESG ratings

Constructive engagement

Up markedly (from high base)

Data
Issue-focused ratings
Stimulus sustainable investment research
Integrated sustainable investment research
Controversy alerts

Shareholder advocacy

Growing (across all sustainability issues and corporate governance)

Data
Issue-focused ratings
Controversy alerts

Sustainability theme investing

Flat

Data
Stimulus sustainable investment research

Integrated analysis (in fundamental bottom up strategies)

Up significantly

Data
Stimulus sustainable investment research
Integrated sustainable investment research

Integrated analysis (in quants strategies)

Rising (from low base)

Data

Impact Investment

Rapid growth (from small base)

Data

Integrated sustainable investment research

What fee structures operate in the market?

  • EC interest: "the contractor should provide ... [details on] ... fees structures [in the market]"
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Outstanding questions

We have questions for research users about

  • The number of different providers that they source research from

We have questions for research providers about:

  • Their approach to fee structures, to pricing and to product definition

What we (think we) already know => Context

Different fee structures deployed

Fee structures that are used for research within the sustainable investment value chain include:

  • Subscription - either at a fixed rate or as a percentage of asset managed according to the use of the product
  • Licencing – where data is licensed for other actors to create commercial products or in-house analysis
  • Membership – where access to products is granted to fee-paying members
  • Sponsored research - whereby a grant funder or commercial provider sponsors research - typically for the purpose of branding or visibility in the market
  • Bespoke research (limited) - whereby buyers specify the topics to be analysed by the research supplier and agree a fee in advance
  • Over-the-counter research sale (very limited) - where research reports are offered for sale after they have been written
  • Commission-bundling - although, under MIFID II, this is no longer allowed in Europe, the practice of paying for research from sell-side brokers from within trading commissions is widespread in other parts of the world and is therefore remains a significant factor in the economics of investment research supply by the sell-side

Payment for corporate access

The recent MIFID II Directive significantly (and intentionally) disrupted the fee and payment structures for corporate access, such that ‘corporate access’ costs are now:

  • In part, borne by asset managers - who undertake the work in-house
  • In part, borne by companies - who undertake the work in-house
  • In part, borne by sell-side brokers - who can find other ways of justifying the provision
  • In part, paid for by asset managers to brokers - on a bespoke (as for roadshow organisation) or piece-by-piece basis (as for conference participation)

The transition underway in ‘mainstream’ corporate access (and uncertain destination thereof) has created significant doubt in the provision of corporate access for sustainability purposes and reduced its availability.  This significantly undermines the depth and quality of communications between companies and investors on sustainability issues.

Subscription - the dominant structure

Subscription is the dominant fee structure used.

  • ‘ESG agencies’ provide sustainability data and ESG ratings on a subscription-basis, whereby a fee is charged for access to a product / service or suite thereof
  • ‘Sell-side’ brokers provide sustainability research on the same charging basis as their ‘mainstream’ research - which, in Europe, has largely migrated away from a commission-bundled approach towards a subscription basis - although some pay-per-item services are available (for example, corporate access conferences)
  • Sustainability research from credit ratings agencies (although nascent) is paid for in the same way as mainstream research from credit ratings agencies - via subscription for services
  • Data providers typically sell licences for access to services - which is much the same as subscription - although such licences are typically provided on a per user basis. Where such services relate to a stream of data for an index, a fee may be charged that is a percentage of the assets managed according to that index
  • Engagement services: Where provided by membership organisations (such as the PRI or CERES) engagement services are included within the overall cost of membership (sometimes enhanced to enable these particular activities). Where supplied by specialist engagement service providers, the services are also provided on a membership basis. Where supplied by asset managers (such as HermesEOS, Robeco or BMO), fees are charged.
  • Grant-funded research providers supply their research to the market for free – as they prioritise widespread distribution over revenue. They are effectively sponsored by the grant provider to do this.
  • Research by other providers is typically undertaken on a bespoke and/or sponsored basis - depending on the intent behind the research and the distribution thereof.

Bundling

We suspect that a fair degree of bundling goes on in the market - whereby products of different types are bundled together into packages by a single supplier.

  • Advantages: Bundling, typically, has three advantages to the user:
    • Simplicity
    • Price - as it is usually supplied at a discount to the cost of the individual products
    • Integration - as different products cohere into a usable whole
  • Disadvantages: Equally, bundling can reduce competition in the wider market or in individual product lines - particularly if different products / services can only be purchased on a bundled basis and not individually.

We will further investigate the extent of bundling within the market and the advantages and disadvantages of this practice.

Other services

We will also be investigating all other revenue sources for providers of SRI research - notably around the provision of services to companies or other issuers that they cover.  Included within these will be services provided for green bonds.

What are the competitive dynamics within the market? What barriers to entry exist within the market? How strong is the challenge presented to the ‘big four’ providers by industry newcomers?

  • EC interest: "the contractor should [identify] the level of competition [in the market] and possible barriers to entry”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have questions for all stakeholders about:

  • Their views on the competitiveness of the sustainability data, ratings and research market.

We have questions for investors about:

  • Their views of the competitive dynamics of this market notably barriers to entry, price and innovation.

What we (think we) already know => Context

The level of competition varies across the different product types in the market.  The market for:

  • Sustainable investment data appears well competed, with ESG ratings agencies competing with financial data providers, and challengers arriving in the shape of firms using AI and machine learning to scrape data from online sources
  • ESG ratings is adequately competed, with the two firms that had achieved a degree of market dominance (MSCI & Sustainalytics) now facing well-resourced competition from ISS-ESG and Vigeo Eiris. The challenge from regional specialists appears to have diminished as many have been acquired in recent years
  • Screening & weighting services are probably competed to the same degree as ESG ratings. Although data for these products are sourced under the same well-competed dynamic as sustainable investment data, the importance of sales and client-accessible platforms is critical
  • In sustainable investment research (stimulus and integrated), competition is extremely strong, driven by the following dynamics:
    • Demand is latent: Although asset managers want to integrate, many have not yet realised the pivotal role that high-quality sustainable investment research will need to play in this process
    • ESG ratings agencies are keen to provide this research to demonstrate depth of understanding and to contextualise their data and ratings subscription products. They typically give this research away at no cost for marketing purposes
    • This is the natural product for conventional financial service players (such as credit rating agencies and sell-side brokers) who are moving into the SRI value chain to provide it
    • Grant-funded research presents a notable challenge - by providing high-quality, in-depth and specialist analysis for free.
  • Controversy alerts - We have identified two significant suppliers of controversy alerts and suspect there may be more. This product area requires further investigation.

Threats to competition within the market

Insufficient scrutiny of asset managers by asset owners (or regulators acting on behalf of asset owners)

In many cases, scrutiny by asset owners and investment consultants of asset managers’ sustainable investment activity is so weak that those asset managers who are not committed to sustainable investment can still get away with buying a couple of ESG data and ratings products and combining this with a little internal process and some of the existing knowledge of the portfolio manager.  In such cases, there is little pressure on asset managers to buy research carefully and intelligently, so they don’t bother.

Bundling

As noted above, bundling has many advantages but also poses a risk to healthy competition in the market.  We will investigate the extent to which bundling occurs in the market.

Support for competition

From side

From the demand side, those asset managers that are committed to sustainable investment are increasingly purchasing data, ratings and research from multiple providers, rather than purchasing from just one data and ratings provider which would have be regarded as adequate in the past.   This enables comparison and improves the level of competition within the market.

What rules (legislative, administrative or other) currently apply to [a] sell-side brokers [b] credit ratings agencies [c] other research firms?  Which rules could (in future) be applied to sustainable investment research providers?

  • EC interest: "The study should also describe whether some national and/or international rules including, but not limited to, legislative or administrative measures could apply to sustainability-related products/services providers.”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have a few questions for existing research providers about the extent to which they believe current regulation around investment research relates to them (if at all) and, if relevant, where they believe the boundary to be between their research and ‘investment research’ as defined in regulation.

What we (think we) already know => Context

Regulations apply to mainstream investment research providers such as sell-side brokers or credit rating agencies at a number of different levels.  Whilst there is some overlap in the objective of the applicable legislation, such as oversight, each sector of the financial service market has been regulated separately, ensuring effective and proportional regulation.  The Credit Rating Agencies are regulated under the Credit Rating Regulation and Directive.  The sell-side are regulated under numerous pieces of national and European legislation, notably MIFID II and MiFIR, as well as those pertaining to financial stability.

Regulation focuses on:

  • Regulatory frameworks including registration and supervision
  • Oversight and internal control including policies and procedures
  • Managing conflict of interests – (unbundling of research and avoiding in CRA)
  • Training and competency of staff
  • Transparency on rating activities (e.g. methodologies and changes that take place) and quality of rating process – accountability (CRAs)
  • Use of product – overreliance on credit ratings (CRA)
  • Increased competition (CRA)
  • The way research is priced, paid for and distributed (sell side research)

Similarly, there are rules that are directly applicable to asset managers in how they report to and communicate with clients about fund and strategies they manage.  These are covered by UCITs, PRIIPS, MiFID II etc.

Finally, benchmark administrators are regulated by the EU Benchmark Regulation which introduces a common framework and consistent approach to benchmark regulation across the EU. It aims to ensure benchmarks are reliable and accurate by improving the quality of input data and methodologies, and to minimise conflicts of interest in benchmark-setting processes.

We believe that no such regulations (beyond laws that govern any organization or individual that publishes information) apply to the provision of sustainable investment data, ratings and research providers.  Specifically, we believe that:

  • ESG agencies - do not appear to be governed by any formal rules or requirements
  • Sell-side brokers - apply the same regulatory standards to their sustainability-related research as they do to the other investment research that they publish
  • Credit ratings agencies - apply the same regulatory standards to their sustainability-related research as they do to the other that they publish
  • Data providers - apply the same standards for the publication of sustainability data as they do for all data provision
  • For impact or grant-funded research providers - do not appear to be governed by any formal rules or requirements

We will explore further whether any equivalence or parallels exists between products and services that are already provided by ‘mainstream’ investment research investment providers and also whether sustainable investment data, ratings and research providers currently consider themselves to be producing research as defined under the MIFID II Directive.

What self-regulatory initiatives exist within the industry?

  • EC interest: " it should include an analysis of existing market standards as well as any industry initiatives on self-regulation. The contractor should provide a summary of the main constituents of these initiatives and analyse to which extent they are used by the ”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have questions for research providers around their involvement in:

  • Self-regulatory initiatives relating to the quality of sustainable data, ratings and research?
  • Initiatives around reducing the workload / improving efficiency of company input into sustainable data, ratings and research?

What we (think we) already know => Context

Market standards and self-regulatory initiatives in this area can be divided into three categories - based on their objectives:

  • Initiatives to increase the volume of or improve the quality of disclosure by companies. (There have been many such initiatives over the past twenty years.)
  • Initiatives to improve the efficiency of data transfer from companies to investors. (For example, through efforts to align the indicators used by different companies and/or demanded by different research providers)
  • Initiatives to improve the quality of sustainable investment data processing, ratings construction or research conduct

Over the past twenty years, all such initiatives have tended to build a head of steam towards launch, maintain this for the first year or so but (because they tend to focus on the desired outcome rather than the underlying economic and competitive positioning) fade away over a year or two with their ultimate objectives unfulfilled.  (Notable exceptions to this observation are the GRI and SASB in the corporate disclosure sphere.)

In our research we will explore whether this perception is accurate or whether there self-regulatory or market standards are likely to drive improvements within the data, ratings and research process.