Impact Investing Forum
London. Nov 18-19. (Virtual)
Making sense of ESG data Investment WeekMaking sense of ESG data Investment WeekMaking sense of ESG data Investment Week
Investor sentiment is shifting towards a more conscientious society, a better planet, and improved governance practices. All financial institutions, large or small, are required to fully control the ESG standings and underwriting positions of their investments and incorporate ESG considerations into their reporting processes and risk management plans.
We witnessed a high-profile incident at the beginning of 2021 where professional hedge fund managers lost their investment due to retail investors making investments to boost stock prices. This activity was coordinated via social networking. Firms could have detected that millions were taking long positions in companies they were selling if they used more sophisticated ESG big-data mining techniques to account for sentiment analysis from social media feeds.
Most tier-one financial institutions now have the ability to monitor their reputations for ESG issues in real-time. Reddit and Twitter are popular social media platforms that monitor sentiment. This allows for quick detection of issues or reputational risks about companies by using well-chosen search words.
This is also true for more thorough web searches for company filings and company references. Such exercises can help to spot when a company gains traction for the right reasons. ESG analysts can also use advanced data mining techniques for trawling through customer complaints and controversies, and then analyse them periodically to identify common themes.
It is difficult to identify the right ESG data source, interpret it, and then combine it. ESG dimensions are not standardised in financial reporting. Companies are not required to report all ESG-related information in a uniform manner. Therefore, practice is inconsistent and fragmented. There are not many standard templates so companies may publish different information in different ways.
Many ESG information can also be self-reported in annual and periodic sustainability reports. This opens up the possibility of ‘greenwashing. Corporates want to be seen in the best light.
A simple plug-and-play off-the-shelf ESG score will not suffice anymore. We have seen firms over-invest carbon because they rely too heavily on these off the shelf ESG scores, or even announce a sustainability strategy that is not compatible with their current (on- or off) balance sheets.
It is not easy to cut through the noise and find relevant information quickly and efficiently. We also saw the opening of a market with two speeds. Global institutions have been active in either building in-house data analytical capabilities to support ESG or buying one of the new breeds of fintech data aggregaters. This space has seen a lot of M&A.
This allows the big institutions to track data signals from multiple sources and decipher them almost immediately. They can also react to news and controversies, read legal documents or analyse investor sentiments via social media. In recent years, even large credit rating agencies and market data providers went on a buying spree to remain competitive and cater to the ESG and sustainability-related demand. It is often more difficult for smaller players who have limited budgets and must balance multiple priorities.
Managers who are unsure of the importance of prioritising this should listen to recent market events.
ESG is a strong contender for financial services, if there is even a small silver lining in the pandemic. ESG is well on its way to making capital markets more transparent and more conscientious.
Budha Bhattacharya heads analytics for ESGIQ, which was developed byKPMGLighthouse. He is also an industrial professor of banking and finance at UCL, Institute of Finance and Technology.