The number of investors and corporations adopting environmental, societal, and corporate governance (ESG) data collection strategies has risen significantly in recent years. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. In fact, estimates show that there are around $30 trillion of assets invested worldwide that rely on ESG information, a huge rise of 34% since 2016.
Today, ESG sits on the verge of a major inflection point. With the availability of non-traditional data sets, investors can measure sustainability on a much deeper level than simple screens based on value judgements. Through this prism, investors can form an increasingly comprehensive framework for how to identify companies that are best positioned for future long-term profitability.
Indeed, the availability to measure sustainability in unique ways has contributed to an increased demand in ESG-aware investing. A recent survey by research provider Vanson Bourne highlighted the importance of ESG considerations when it comes to setting out investment strategies. Around 76% of US respondents from within the finance, banking, and insurance sectors said that their investment decisions are impacted by ESG factors. In addition, 67% of UK respondents also reported that they now commonly use ESG data when considering an investment action.
As such, ESG data can be used to inform investment decisions by painting a more nuanced picture of an organisation and uncovering any current or future potential financial risks. It can also be used to help investors rank an organisation’s socio-economic impact compared to similar companies in the same sector.
Ultimately, this type of information is mission critical for those looking to make prudent long-term investment decisions. But before investors go out there and tap into the newest and most innovative pool of ESG data, it’s worth bearing in mind the following three considerations.
Define, define, define your ESG data
The term ESG 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, ESG 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 data sets and parameters for collecting ESG data. A common mistake is to standardise the data you collect across companies. This often leads to irrelevant data skewing the results of your ESG investigations. For instance, large tech companies like Twitter 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 complete endorsement of their ESG credentials. For this reason, a bespoke approach on a per-sector basis is often more effective and gives more accurate results.
Behind the veil: understanding ESG data - test & verify first
It’s obvious that ESG data has become more than just a 'nice to have'; it is now a major consideration for investment decisions and overall business growth. But simply collecting raw data is not going to equip you with the insights you need to make a successful investment or a big business decision. Testing the data first in small dosages, and then analysing and assessing it are crucial factors. However, they can be complex to undertake.
A common misconception when it comes to ESG data sets is ‘the bigger the better’. Although the amount of possible ESG data available has exploded in recent years, not all of it is of high quality, and some will likely be irrelevant to your particular use case. Leaving you time to analyse the data is essential, which is why wasting your time on the collection process may prove to be counterproductive. Every hour left for you to sift through varied data (e.g., images, numbers, social media posts – anything that's publicly available online) will be well worth it, enabling you to gain a more accurate insight into how a company or sector is performing from an ESG perspective.
How does future-forward online data collection fit into this?
Looking at companies’ respective ESG ratings and collecting alternative (alt)/external ESG data is often incorrectly conflated. On the one hand, ESG ratings help companies measure the ESG impact of their operations. 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 you of the short- and long-term risks and returns of an investment venture. For example, it would be wise to consider climate change data and information about historical natural disasters before investing in construction in a particular region. Much of this data exists across the largest database in the world – the World Wide Web. This is where data collection comes in – providing new and innovative ways to look at ESG data that go far beyond the traditional ways we have all become accustomed to.
Estimates from AIMAand others claim that there will be over 5,000 different alt-data sets available by 2024. These vary in quality, breadth, type, and countless other factors, but this figure demonstrates the market's growing appetite for alt-data. Data collection platforms can tap into this vast set of publicly available online data – the internet – to gather necessary information and relate it back to financial units to guide their predictive insights.
Going forward, the recent survey numbers mentioned earlier tell the story well. 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 take advantage of the new data opportunities accessible to them, online data included. They should particularly focus on determining which data is most reliable and easily leads them to accurate forward-thinking strategies. With online data, investment calculations, future growth opportunities, and possible profits have been made that much sharper and easier.
By Omri Orgad, Regional Managing Director at Bright Data (formerly Luminati Networks)
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