ESG investing strategies powered by public data – predicting companies future performance and impacting evaluation

It’s often said that knowledge is power, and this is especially true in the financial sector. More and more, this knowledge is being delivered through data, but not data as we previously knew it. In today’s world, the utilization of alternative or external data is growing in popularity as financiers realize that it can offer invaluable insights into potential investments and organizations. By analyzing publicly available information from the internet, they can make better informed decisions relating to present or future strategy decisions.

Today’s financial analysts and hedge fund managers are increasingly looking towards a ‘shared value’ model. It’s becoming more common to evaluate an organization’s environmental, social, and corporate governance (ESG) credentials using alternative data (alt-data). This approach enables financiers to uncover a more nuanced picture of an organization, its financial risks and future investment potential.

After all, with the advances in data-focused technology and the value it brings, it’s possible to gather a near-endless supply of publicly available information from the world’s largest database – the internet – and to analyze it to inform financial valuations.

Alt-data refers to any information gained from non-traditional external sources. When this is used for the purposes of ESG investing, it typically includes all information related to an organization’s impact on its surroundings, including data covering energy use, emissions, discrimination lawsuits, board diversity, executive pay, etc.

Ever since the launch of the UNPRI (United Nations' Principles for Responsible Investment) in 2006, interest in ESG across the financial services sector has soared. 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.

A recent survey conducted by Vanson Bourne and Bright Data, a web data collection platform, highlighted that nearly a quarter (24%) of financial services professionals working in organizations that collect ESG alt-data use it daily to aid their decision-making. It’s clear that ESG has evolved from a secondary consideration to a primary concern when it comes to investment decision-making.

ESG alt-data can come from a variety of sources and include information from social media, job listings, reviews, journalistic articles, blogs and more. It can help investors understand factors including consumer intent and public sentiment – something traditional data, such as SEC filings, broker forecasts, and financial records – cannot do.

Chief Data Scientists, CTOs, Heads of Data, CIOs, and their teams report that they use ESG data for the following top three considerations: environmental practices (69%), organizational diversity (64%) and corporate governance (64%).

It is worth clarifying the difference between one-and-done ESG ratings and collecting ESG alt-data. There is 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 organization. For instance, some standardized 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.

On the other hand, by investing in alt-data platforms and building proprietary analysis and ESG reporting systems, financiers can determine which ESG factors they consider most important, and how they are weighted.

In order for investors to inform their portfolios on an ongoing basis, they need alternative data sets that are precise and trustworthy. It’s no surprise then that the number of such data sets is growing exponentially – it’s estimated that there will be over 5,000 different alternative data sets available by 2024. While these will likely vary in quality, breadth, type, and countless other factors, the estimates are a real representation of the market’s growing appetite for alt-data. 

An enormous amount of raw ESG alt-data can be gathered using web data platforms. However, when analyzing so many interconnecting factors, and with so much data available, it can be difficult to draw conclusions. Therefore, when using web data platforms, it’s crucial for investors to first establish parameters for data retrieval before deciding exactly how much data is needed.

ESG factors don’t just indicate how much ‘good’ a company does in the world; they are a notable predictor of financial performance. As the speed with which data is generated continues to grow, so too will financiers’ dependence on tools like ESG alt-data to inform their financial decision-making. This is not a flash-in-the-pan trend – it’s an ongoing and ever-growing practice that will continue to impact the evaluation of companies and investments for decades to come.

 

Omri Orgad is the North America, Managing Director at Bright Data