Sponsored post by Omri Orgad
Gone are the days when the Friedman Doctrine – which states that a company’s sole responsibility is to its shareholders – was the accepted way of doing business.
Today’s financial analysts and hedge fund managers are increasingly looking towards a “shared value” model, which considers environmental, social, and corporate governance (ESG) factors. This approach enables them to uncover a more nuanced picture of an organisation, its financial risks, and future investment potential.
To accurately assess an organisation’s ESG credentials, many are turning to ESG alt-data. Data-focused technology has come a long way in recent years. With the right tools, it’s possible to gather a near-endless supply of publicly available information from the world’s largest database – the Internet – and to analyse it to inform financial valuations.
Here, I unpack the definition of ESG alt-data, explain how it is measured and collected, and delve deeper into why online data collection is crucial to ESG investment decision-making.
What is ESG alt-data?
Simply put, the term ‘alt-data’ refers to any information about a financial instrument gained from non-traditional sources. Within this, ESG alt-data encompasses information that is related to the impact an organisation has on its surroundings. This can include data covering energy use, emissions, discrimination lawsuits, board diversity, executive pay, and so on.
Interest in ESG across the financial services sector has soared since the launch of the UNPRI (Principles for Responsible Investment) in 2006. In fact, a total of over $20 trillion of global assets under management – or about a quarter of all worldwide professionally managed assets – are invested with ESG factors taken into consideration. In the UK alone, an average of £124m a week is invested into ESG funds.
Investors need alternative data sets that are precise and trustworthy to inform their portfolios on an ongoing basis
Omri Orgad
A recent survey conducted by Vanson Bourne and Bright Data highlighted that nearly a quarter (24 per cent) of financial services professionals working in organisations that collect ESG alt-data use it daily to aid decision-making. With this in mind, it’s clear that ESG has become more than just “nice to have”. It is an increasingly obligatory consideration when it comes to investment decision-making.
Accessing ESG alt-data
In practice, ESG alt-data comes from a variety of sources. It can include information from social media, job listings, reviews, journalistic articles, blogs and more. Unlike traditional data, such as SEC filings, broker forecasts, financial records, etc., it can help investors understand factors including consumer intent and public sentiment.
In terms of subject matter, Chief Data Scientists, CTOs, Heads of Data, CIOs and their teams, report that they use ESG data to inform the following top three considerations: environmental practices (69%), organisational diversity (64%), and corporate governance (64%).
It is worth clarifying the difference between one-and-done ESG ratings and collecting ESG alt-data. 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 help investors look at the overall picture of a company’s performance, this approach doesn’t enable them to comprehensively understand the short- and long-term ESG risks of investing in a particular organisation. 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 to say the least.
This is where ESG alt-data collection tools come in. Investing in these – as well as building proprietary analysis and reporting systems – allows investors to get ahead with more certainty than they have experienced before.
Web data collection
Investors need alternative data sets that are precise and trustworthy to inform their portfolios on an ongoing basis. According to AIMA and others, there will be over 5,000 different alternative data sets available by 2024. These will likely vary in quality, breadth, type, and countless other factors, but the estimates are a real representation of the market’s growing appetite for alt-data.
A huge amount of raw ESG alt-data can be gathered by collecting information that’s publicly available online. This is where online data collection tools come into play. Using these, investors can easily gather the information they need, and relate it back to financial units to guide their predictive insights.
However, when analysing so many interconnecting factors, it can be difficult to draw conclusions from raw data. Therefore, when using online data collection tools, it’s crucial for investors to first establish exacting parameters for data collection and decide exactly how much data is needed.
The best way to do this is to start relatively small and then to scale up in the future while using automated tools for an easy and simple process.
It’s becoming increasingly evident that ESG factors don’t just indicate how much ‘good’ a company does in the world; they are an accurate predictor of financial performance, too. As such, going forward, there’s no doubt that ESG alt-data will soon be at the forefront of financial decision-making – and will likely remain there for many decades to come given the speed that we are generating data daily.
The key factors in ESG decision making
Omri Orgad is Regional Managing Director at Bright Data