By Omri Orgad, Regional Managing Director at Bright Data (formerly Luminati Networks)
You may think today’s financial analysts and hedge fund managers are solely motivated by boosting quarterly returns for investors, but you’d be wrong. For many years, and now more than ever, environmental, social, and corporate governance (ESG) issues have been playing an increasingly important role in investment decision-making. ESG data paints a more inclusive picture of an organisation, its financial risks, and future investment choices. It helps determine an organisation’s own socio-economic impact in its given sector but also draws in data that can be analysed to inform and guide future investment strategies.
As such, ESG data is varied, offers more information, and is considered as alternative data (alt-data). It includes measurable metrics from areas such as energy use, emissions, harassment and discrimination lawsuits, board diversity, social involvement or involvement in worthy causes, and so on. This kind of information is mission-critical for those companies looking to make prudent long-term investment decisions. The equation has been proven long ago: Those with an extensive ESG program usually showcase higher business performance results.
When analysing so many interconnecting factors, it can be difficult to draw conclusions from raw data. Fortunately, data-focused technology has come a long way, and there are those who possess the expertise needed to crunch the data and perform financial valuations based on it. It’s in these valuations and analyses where ESG alt-data shines.
In this article, I will unpack the definition of ESG alt-data, explain how it is measured and collected, and delve deeper into understanding why data collection is now king when it comes to smart ESG investing.
Understanding ESG within the financial sector
ESG stands for environmental, social and governance – simply put, it is information that is related to the impact an organisation has on its surroundings. Across the financial world, interest in ESG soared alongside the launch of the UNPRI (Principles for Responsible Investment) in 2006, which integrated ESG factors into investment decisions and portfolio management strategies. Nowadays, looking at available ESG data is becoming the norm for investors looking to better understand the long-term value and future investment outlook of a company.
As global economic policies and financial systems are aligning, so too are financial markets, which are now developing more sustainable investment strategies. In fact, ESG investing is estimated to total over $20 trillion in assets under management, or about a quarter of all worldwide professionally managed assets, with investors in the UK investing an average of £124m a week into ESG funds. Other assessments are higher, estimating that $30 trillion of assets invested worldwide are in some way influenced by ESG data, a huge rise of 34% since 2016.
It’s evident that ESG has become more than just a ‘nice to have’ element; it is now a huge consideration when it comes to investment decisions and business growth.
Assessing ESG alt-data… how important is it?
In its most conventional form, the term ‘alt-data’ refers to any information about a financial instrument gained from non-traditional sources. In practice, this can include data around sentiment, expert networks, qualitative data from social media, and so on. Alt-data helps provide an indication of the future performance of a company outside of traditional ways of sourcing data, such as SEC filings, broker forecasts, financial records, press releases, and media reports.
A recent survey gathered in cooperation with leading market research experts Vanson Bourne highlighted that nearly a quarter (24%) of financial services professionals who work for organisations that collect alt-data use it daily to aid their work. Furthermore, respondents from financial services – including insurance, banking, and hedge funds – found a clear dependence on external data sources, with 95% of financial services organisations relying on outside information to contribute towards business success in the past year.
In short, ESG alt-data serves as a benchmark for companies to enhance their socio-economic impact and to inform future decision-making for investors.
Why is online data collection king?
It is worth clarifying the differences between measuring ESG ratings and collecting ESG alt-data. On the one hand, ESG ratings help companies determine their own sustainability metrics and measure their socio-economic impact within a given market or region. For example, a logistics company hiring 1,000 trucks to deliver goods or paperwork can take note of their eco-footprint by measuring the levels of Co2 produced by their diesel-reliant trucks, the number of kilometres driven per day, etc. This measurement will then contribute to their overall ESG rating. On the other hand, ESG alt-data helps to accurately inform companies of the short- and long-term risks and returns of an investment venture for predicted future profitability. For example, an investment firm can gather alt-data from a recent natural disaster, say a hurricane in the United States, that can inform investors of the impact this will have on upcoming construction investment within a region. Much of this data exists across the largest database in the world – the World Wide Web.
However, reporting on ESG metrics and sustainable investing is not an easy task. One of the many challenges is detecting, collecting, and analysing the publicly online available data that informs and forms ESG data sets. Gaining access beyond a news report, a survey, or a quarterly report is not easy. Investors need alternative data sets that are accurate, credible, and consistent in order to inform their portfolios on an ongoing basis.
This is where data collection comes in. Estimates from AIMA and others claim that there will be over 5,000 different alternative data sets available by 2024. These vary in quality, breadth, type, and countless other factors, but the figures are a real representation of the market’s growing appetite for alt-data. Data collection platforms are able to tap into this vast set of publicly available online data, gather the necessary information, and relate it back to financial units to guide their predictive insights.
Going forward, there’s no doubt that ESG alt-data will be at the forefront of financial decision-making for many years to come. To get the best possible results, financial institutions should focus on determining which data is available, reliable, and easily analysed. The role that publicly available online data collection will play in this will no doubt be significant.