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BIG Data: Getting Granular with ESG Factors
Traders Magazine Online News, November 2, 2018
With the growth in sustainable investing, there’s been a surge in data on environmental, social and governance (ESG) factors over the past few years.
Demand for ESG data is rising as asset managers look to incorporate ESG factors such as low-carbon emissions or gender diversity on boards into their investment analysis and decision-making processes.
Fund managers, including BlackRock and Vanguard, are offering sustainable funds and exchange-traded funds (ETFs) based on sustainable indexes to capture assets from millennials and women.
But the uptake has moved beyond specialty funds and has spread to pension funds, particularly in Europe, looking for long-term returns, reported Bloomberg Intelligence in April.
“The financial cost of environmental, social and governance (ESG) performance and better disclosure is spurring uptake,” wrote Bloomberg Intelligence in “Sustainable Investing Grows on Pensions, Millennials.” Issues pertaining to energy efficiency, water scarcity, safety, and diversity are gaining wider investor interest, even without the sustainability label, Bloomberg wrote.
An estimated 26% of assets measured globally — or almost $23 trillion — falls under the field of sustainable or socially responsible or ethical investing, according to Bloomberg.
Pension funds in Europe are allocating to ESG managers and some regard this as part of their fiduciary responsibility.
Some are reacting to stricter regulations on greenhouse gas emissions or shareholder resolutions on executive compensation policies.
“The idea that investors who integrate corporate environmental, social and governance risks can improve returns is now rapidly spreading across capital markets on all continents,” wrote Georg Kell, founding director of the UN Global Compact, in a Forbes column“ The Remarkable Rise of ESG. Kell is the founding director of the United Nations Global Compact, an organization founded in 2004 to promote integration of ESG issues in investment decision making.
Traditional market data and index companies such as MSCI, Bloomberg, and Thomson Reuters, have become major suppliers of ESG metrics and scores on public companies. In July 2017, Morningstar, the independent research firm, acquired a 40% stake in Sustainalytics, a leading provider of ESG research and ratings.
While there is more ESG and sustainability information disclosed publicly there have been questions about which information is most useful or relevant to making financial decisions.
“Another major barrier has been a lack of data and the necessary tools to get a handle on the fragmented and incomplete information available,” wrote Kell, who is currently chairman of Arabesque, a London-based ESG quant fund manager using big data to quantify the performance of global public companies on ESG factors.
A Role for AI?
Eyeing the demand for more accurate data and metrics, some fintech startups contend that A.I. has a role to play in ferreting out ESG issues that could have a material impact on a company’s financial performance.
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