By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow
There is an expansive reservoir of ESG data – a.k.a. key performance indicators (KPIs) – across growing corporate ESG disclosure and reporting, commercially advertised metrics and/or data sets subscription access, and proprietary third-party rater, ranker and data provider analytical systems.
While voluntary reporting frameworks and the various third parties jockey for dominance and survival, who is using all this data — and how?
Currently, there are too many ESG-related KPIs and data sets for companies and investors to get a handle on, respond or analyze. It is impossible to predict how many more KPIs will enter the mix or how soon third-party relationships will naturally consolidate the number of KPI expectations, simply driven by necessity for their own business models’ sustainability.
Just like corporations, investors have to prioritize which KPIs matter and what reporting framework KPIs, public access information sources, licensed and/or proprietary databases they can rationalize for focus.
CFA-PRI recently joined forces to survey 1100 investment professionals. Survey results show that fixed income inclusion of ESG in investment decision-making is rapidly catching-up with equity investors.
Analogous to portfolio diversification theory, the number of investments (in both time and money) in ESG data sources has got to naturally reach some optimal number needed to optimize risk/return. Beyond that there is an entire sustainable finance ecosystem too large to address in a simple blog post.
There is not an honest person alive who can tell you that they can stay on top of all the current and increasing company ESG data they could analyze, germane to their investment decision-making.
Research of Value
In addition to 90% of S&P 500 companies, Governance & Accountability Institute just announced its annual research update that 65% of Russell 1000 companies also published sustainability reports in 2019 (up from 60% in 2018), including 39% by companies in the smallest half of the index (up from 34% in 2018).
“There is an explosion of non-fundamental data…especially in ESG data…The
SEC found that 90% of data now used in the capital markets has been created during the past two years.”
AI use as a tool to consume, filter and analyze, huge reservoirs of ESG data is increasingly valuable in investment decision-making. AI providers are jockeying for differentiation and capital. For instance:
- AI is being used by investors, such as BlackRock, to not only analyze ESG data that companies are disclosing, but to uncover other information, such as ESG impacts from satellite images of pollution to cars in a parking lot, voice inflection and more.
- FactSet just announced, on October 20th, a definitive agreement to acquire TrueValue Labs. Founded in 2013, TrueValue is a pioneer in AI-driven ESG data. It applies AI-driven technology to over 100,000 unstructured text sources in 13 languages, to identify positive and negative ESG behavior. Its coverage spans over 19,000 public and private companies.
- TrueValue LabsTM had previously announced on January 23, 2020, that it was introducing its patent-pending concept of Dynamic Materiality, indicating that every company, industry and sector has a unique materiality signature. The company head of research noted that, “Given how central materiality is to ESG investing and fiduciary duty, it is critical to understand the mechanisms by which ESG factors impact the operational and financial performance of companies.”
The Human Element
“While AI can unearth key data for investors seeking sustainable investments, discerning unreliable information will be a key challenge and humans will not be replaced any time soon.” – as stated in the article titled, How can AI help ESG investing? – S&P Global, Sept 2020
“AI is not a replacement for human intelligence, but rather a way to further it… The strategic value of alternative datasets, in particular ESG data, in the financial sector is becoming increasingly visible. As only relevant data has decision-making utility, supervised machine learning is emerging as the most effective mechanism to generate strategic value for businesses.” – Cutting through the noise: demystifying the buzz around artificial intelligence in financial decision-making – RepRisk, Sept 2020
The Final Word
In only the last few years, it became obvious that ESG/Sustainability had finally gone mainstream. It took over twenty years to catch-on, since the first voluntary ESG reporting framework, GRI, was founded in 1997. Now it is time to buckle-up for the ride… practically everything ESG/Sustainability-related is advancing at orders of magnitude faster pace than anything we’ve experienced thus far!
Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.