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ESG and the role of alternative data

By Sam Sundera, Head Future Business, SIX

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ESG Data

Fighting climate change is one of the most important goals on the global political agenda, with social and governance factors also being hot topics. This has instigated a global shift in the financial sector towards sustainable investment strategies, and the choice for future-oriented investors is expected to keep on growing....

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by SIX Group
| 09/06/2021 15:40:01

Adoption of ESG strategies by investors and corporations globally has risen astronomically in recent years. Today, US$17 trillion (or one of every three dollars professionally managed in the US) is invested in sustainable investment strategies, according to the US SIF Foundation’s biennial Trends Report. By 2025, Deloitte predicts that ESG-mandated assets will comprise half of all professionally managed investments.

This dramatic shift, however, will not be sustained unless we facilitate the capture and reporting of ESG data within wealth management, in a way that is useful to all market participants. The strong interest in sustainable investments is matched by an equally strong industry and investor-driven need for quality ESG data in order to separate the “green” institutions from the “greenwashed” ones. A recent survey by BlackRock found that 53% of their respondents cited concerns over poor quality or availability of ESG data and analytics. According to data from Opimas, the ESG data market could approach US$1 billion in 2021.

Raw ESG data is difficult to source and many companies do not report on their ESG performance, or only on some limited aspects of it. And even if there is data available from companies, that information is often not easily comparable between companies due to the absence of a uniform standard. This poses a challenge for the wealth management industry.

Current data is also focused on the climate and environmental impact of companies, and to a lesser extent on social factors such as diversity and inclusion, or human capital management issues in general. Furthermore, there is a lack of non-financial data on companies that are not based in the major markets (e.g. emerging markets) and from small and mid-cap companies. By bringing these non-financial factors onto corporate balance sheets, the overall performance of many companies begins to look very different.

With such issues, how will wealth managers and other market participants separate the truly sustainable from those masking as such?

The first issue is to understand what data is needed and to define the benchmarks and frameworks to analyse and standardise it. A sophisticated data base with cleanly sourced, aggregated and refined data is crucial. Wealth managers, other financial institutions and non-financial companies will also turn their attention to the role of alternatively sourced data and alternative data in the hunt for quality ESG data. Alternative data is on the rise. We expect to see this alternatively sourced data, data extracted from news and social media, which represents public opinion and consumer views, to play a role in providing an alternative view.

Across the globe, an increasing number of institutions and firms are using alternative data to inform important business and strategic growth decisions. Alternative data can fill the gap between ESG reporting frameworks by providing research and insights that goes beyond what is reported officially by the company in question. By incorporating this data with ESG data and financial metrics, investors will have access to a fuller, “greener” picture of a company’s ESG practices, providing them with all the relevant information needed to make sustainable investment decisions.

By collecting real-time and relevant social media data and analysing each data-point, investors can access a detailed analysis of public or community outlook of a company perception over any given time period. Combined with the existing ratings options available to investors, this extra data provides them with a timely and deeper insight into the ESG practices of individual companies.

This community voice data is crucial when analysing a company’s ESG credentials. Combined with the existing ratings and company reported ESG data available to investors, it creates a full view of a company’s ESG practices that will empower investors to make informed decisions in line with their sustainable investment goals. Institutional and retail investors can leverage on this alternative data source to uncover unique signals that have financial materiality.

And as ESG orientated investing grows increasingly important to investors, technology and analytics, such as AI-driven data analysis, will empower them to effectively assess the sustainability of the various financing options available to them. The use of artificial intelligence and alternatively sourced data will give wealth managers greater capabilities to uncover material ESG data, provide investors with the products they want and ultimately achieve a better risk/return trade-off.

The interest in ESG investments is undeniable and it is here to stay but there are major hurdles that need to be overcome before we reach a consensus. Crucial to reaching this consensus will be ensuring the sourcing, aggregation and refining of quality ESG data to ensure that wealth managers and all market participants, including retail investors, companies and investment managers, are making the most informed decisions.