The Rising Potential of Alt-Data Collection Within ESG
The use of alternative ESG data (ESG alt-data) by institutional investors is growing in popularity.
Factset estimates that around 70% of global investment companies are still exploring how to best deploy and understand the growing opportunity presented by ESG alt-data. A Vanson Bourne survey also revealed organisations that incorporate ESG alt-data into their business strategies found that an average of 76% (USA) and 67% (UK) of their investment decisions are now informed by ESG factors.
This type of research highlights the importance of ESG considerations in investing and demonstrates the importance that organisations place on environmental and social impact when doing business. It’s no wonder that most professional investors out there, having seen the value that this data can deliver to their clients, are now exploring more avenues for collecting ESG alt-data. Ultimately, this information is mission critical for savvy investors.
But before you decide to make use of ESG alt-data, you need to first understand clearly what it is, what its benefits and limitations are, and how you can most effectively deploy it to help your business’s decision-making be more impactful and successful. Omri Orgad, Regional Managing Director at Bright Data, tells us all about it.
What is ESG alt-data?
Alternative (alt) or external data is a subset of data, driven by the growing demand for real-time, on-the-spot insights. While all industries can benefit from analysing alt data, its key uses lie within the financial sector, where startups, VCs, and all manner of organisations have a really heightened need for it. This is because their decisions and future innovations involve product development and predicting future market trends. But to really bring something unique and disruptive to saturated markets, investment heads must perform comprehensive market research and dig deep into data lakes such as ESG. However, doing so is not always the easiest of tasks!
The phrase “ESG alt-data” covers all information 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, this data varies in type and size, making it complex and daunting to collect and understand. The financial services sector can now measure sustainability at a far deeper level than ever before, thanks to the increased availability of non-traditional ESG data sets. It is now possible to create a comprehensive framework that identifies the organisations that are best positioned for long-term profitability using ESG alt-data.
While all industries can benefit from analysing alt data, its key uses lie within the financial sector, where startups, VCs, and all manner of organisations have a really heightened need for it.
Where does web-based ESG alt-data shine?
ESG alt-data can help examine Unique Selling Propositions (USPs) by aggregating similar solutions in the industry that are currently being invested in by venture capitalists (VCs). Finding the same type of companies trying to solve similar pain points can form a better view of who the future competitors might be. Alt-data can also aid in making the right kind of investment-focused decisions. During the past year, more and more hedge funds have increased their use of online data to analyse present market shifts and anticipate future ones as well as tune their investment strategies accordingly.
ESG alt-data helps to accurately inform you of the short- and long-term risks and returns of an investment venture, too. 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 public data exists across the largest database in the world – the World Wide Web. This is where public online 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.
When it comes to ESG alt-data, bigger isn’t always better
According to AIMA and other sources, by 2024, there will be over 5,000 separate alt-data sets available. Even though the amount of ESG data available continues to grow, not all of it is of high quality, and some will be irrelevant to your specific use case. As a result, merely gathering any raw ESG alt-data you may find will not provide you with the information you require. Also, make sure you verify the source of the information you’re collecting or having collected for you and first ask yourself “why is this data valuable to me?”
It’s also important to allocate sufficient time to test and analyse the data you collect. Every hour spent on this task will be well worth it, enabling you to more accurately determine how a company or sector is performing from an ESG perspective. It’s important not to cut corners at this stage, however tempting it may be. There are also faster-automated tools that can take care of the “heavy lifting” for you and swiftly deliver top-quality data.
Web-based data collection for ESG alt-data
Speaking of faster-automated tools, the bigger question now is, how? How do I collect these large amounts of public data from the web? How do I make sense of and analyse it?
Well, automated data collection tools can help tap into those publicly available data pools. Such tools help to gather information and relate it back to those groups that need it to guide their predictive insights. Collecting publicly available images, statistics, social media posts, news articles, etc. enables investors to gain a much more holistic view of an organisation’s ESG picture. Investors can also simply get consumable information by accumulating their own ESG alt-data, which is useful for reporting progress to stakeholders who lack in-depth financial services knowledge. For, example, it’s preferable to say, “the organisations we’ve invested in have 20% more female employees than the sector average” than quoting an opaque figure, by saying, for example, “the organisations we’ve invested in have an average ESG score of 89.3”.
Given that 97% of information specialists in the UK and US financial services sectors report that ESG data is used in some or all strategy decisions, there’s no doubt that the importance of ESG alt-data in financial decision-making will continue to grow for many years to come. To get the best possible results, investors should take advantage of the new data-gathering opportunities on offer – including online data collection tools. With such platforms, calculating investment returns, future growth opportunities, and possible profits has become much easier and significantly faster.