The momentum behind ESG investing has been building for years. From the early days of screening out “sin” stocks to the increasingly sophisticated integration of ESG factors, sustainable investing has been on a consistent upward trajectory. Today, assets using sustainable investment strategies total more than $30 trillion, according to the Global Sustainable Investment Alliance. (I’ve chronicled this industry evolution in my whitepaper “ESG Research in the Information Age.)
But we have hit an inflection point. Mainstream investors and companies now conceptually understand that ESG is a clear driver of long-term value creation. But in order for a concept to become actionable in the investing world, one must be able to quantify it. In short, data matters.
This is precisely the message that an assemblage of large asset managers delivered to the SEC recently. Now that ESG investing has moved beyond the realm of the niche, mainstream investors seeking a higher level of data quality are taking the case to regulators.
ESG ratings are “too simplistic and backwards-looking,” according to the investors sharing their perspective with the SEC. Asset managers have expressed an interest in more transparent rating frameworks, less reliance on unaudited, company-disclosed sustainability information, and more timely data for investment decision making.
Initiatives like the Sustainability Accounting Standards Board (SASB) and the UK Financial Stability Board’s Task Force on Climate Related Financial Disclosures (TCFD) are moving corporate disclosure in the right direction. But to get the full picture of a company’s impact, investors need to augment their analysis with information from external sources.
We have entered the Big Data era, in which the abundance of information presents us with both challenges and opportunities. With ESG-relevant information pouring in from a sea of news publications, trade journals, social media, and NGO reports, analysts are awash in unstructured data. Figuring out what matters and making sense of it is no easy matter.
Luckily, artificial intelligence – in the form of natural language processing and machine learning – is transforming industries across the economy, bringing heretofore unknown efficiencies and scalability. Guided by human intelligence, technology enables identification of relevant information amidst the proliferation of data. Applying the power of AI to the world of ESG-oriented big data is precisely what is needed to bring order and structure to the data overflow.
In terms of growth and acceptance, ESG investing has clearly achieved a new level of relevance. That said, criticisms of ESG ratings and company-reported data are legitimate. Overcoming these obstacles is both solvable and essential for the field to continue its maturation. The tools are at hand. Let’s use them.