By Omri Orgad, Regional Managing Director at Bright Data (formerly Luminati Networks)
The number of private equity fund managers, asset managers and wealth managers adopting environmental, societal, and corporate governance (ESG) data collection strategies is on the rise. These professionals are increasingly considering non-financial factors when analysing the material risks and growth opportunities of investments. A recent survey of organisations that incorporate ESG data into their business strategy found that an average of 76% (USA) and 67% (UK) of their investment decisions are now informed by ESG factors.
With the growing availability of non-traditional ESG data sets, the financial services sector can measure sustainability on a much deeper level than ever before. Using alternative ESG data, it’s possible to form a comprehensive framework that identifies the companies best positioned for long-term profitability.
Ultimately, this information is mission critical for savvy investors. But before diving into the deep pool of ESG data available, it’s worth bearing in mind the following three considerations.
Understand the limitations of “one and done” ESG ratings
There are a whole host of ESG ratings providers out there. Most use their own unique formula to calculate a single ESG score. Though this can be helpful in gaining an entry-level insight into a company’s performance, this approach doesn’t enable investors to comprehensively understand the short and long-term ESG risks of investing in a particular company. For instance, some standardised ESG ratings place British American Tobacco above financial services companies like Barclays or Standard Chartered – which many would argue is a one-sided assessment.
This is where alternative ESG data collection tools come in. Investing in ESG alt-data collection tools – as well as building proprietary analysis and reporting systems – allows investors to get ahead. Such tools provide new and innovative ways of understanding environmental, social and governance factors, painting a more nuanced picture and uncovering current or future financial risks that may otherwise remain hidden.
Much ESG alt-data exists across the largest database in the world – the World Wide Web. Data collection tools can tap into vast amounts of publicly available online data, automatically gathering information and quickly relating it back to financial units to guide their predictive insights. Collecting publicly available images, statistics, social media posts, news articles etc. enables investors to gain a much more holistic view of an organisation’s ESG picture. Plus, by gathering their own ESG alt-data, investors can source easily digestible insights, which are useful for reporting progress to stakeholders who lack in-depth financial services knowledge. For, example, it’s preferable to say, “the organisations we’ve invested in have 20% more female employees that the sector average” than quoting an opaque figure, “the organisations we’ve invested in have an average ESG score of 89.3”.
Make sure you know what you’re looking for
The term “ESG alt-data” encapsulates all information that is related to the impact an organisation has on its surroundings. This includes metrics such as air quality, board independence, water use, discrimination lawsuits, executive pay, etc. Given the diverse nature of the potential data points, this data varies in type and size, which makes it complex and daunting to collect and understand.
With the large variety of non-traditional data sets available, investors must pay special attention to how they define their parameters for collecting ESG data. A common mistake is to standardise the data you collect across companies and sectors, which can lead to irrelevant data skewing your results. For instance, large tech companies like Facebook may come out favourably when factors like land or water use are included in their overall ESG analysis. However, given that their business models don’t depend on the use of either, a positive ranking can hardly be considered a ringing endorsement of their ESG credentials. For this reason, a bespoke approach on a per-sector or even per-company basis will yield more valuable results.
When it comes to ESG alt-data, bigger isn’t always better
Estimates from AIMA and others claim that there will be over 5,000 different alt-data sets available by 2024. Although the amount of ESG data on offer continues to explode, not all of it is of high quality, and some will likely be irrelevant to your particular use case. As such, simply collecting any raw ESG alt-data you can find is not going to equip you with the insights you need. Make sure you verify the source of the information you’re collecting or having it collected for you, and first ask yourself “why is this data valuable to me?”.
It’s also important to allocate sufficient time to test and analyse the data you collect. Every hour spent on this task will be well worth it, enabling you to more accurately determine how a company or sector is performing from an ESG perspective. It’s important not to cut corners at this stage, however tempting it may be. There are also faster automated tools to take care of the “heavy lifting” for you and deliver to-notch data quality fast.
Given that 97% of information specialists in the UK and US financial services sectors report that ESG data is used in some or all strategy decisions, there’s no doubt that the importance of ESG alt-data in financial decision-making will continue to grow for many years to come. To get the best possible results, investors should take advantage of the new data-gathering opportunities on offer – including online data collection tools. With platforms like this, calculating investment returns, future growth opportunities, and possible profits has become much easier and significantly faster.