ESG X Big Data: Solving for the Double Bottom Line

The view by many is that sustainable investing is concessionary in that financial results are forgone in order to achieve sustainable outcomes. Our historical analysis shows that this assertion isn’t true and that unique ESG data can be predictors of company results. Sustainability goals and environmental, social, and governance (“ESG”) measures are no longer novel concepts as they become more mainstream investment topics. Investors, companies, and regulators are increasingly striving to understand why investments with positive ESG attributes are important to integrate. However, they might still struggle with how to achieve better sustainable outcomes or know what ESG-related information is necessary to make the right investment decisions. In this Insight, Anna Hawley and Jeff Shen reveal why ESG and future profitability are linked, and how big data can help investors understand which companies could outperform peers in the long run.

An inflection point for ESG data

Currently, there’s no single standard for how ESG information should be analyzed and disclosed. Because of this, investors tend to rely heavily on generalized ESG “scores” provided by a handful of vendors. Scores, however, have very little consistency across vendors, and none of them validate the link with firms’ performance on the E, S, or G dimension. In order to gain a deeper, more sophisticated understanding of ESG-related alpha drivers, investors are increasingly leveraging big data and artificial intelligence for ESG information collection and analysis. While ESG scores provide a static view, alternative data provides more dimensions of insight. Technology and innovation are becoming key to successful sustainability investing.

Similar to our observation with big data in 2008, sustainability insights benefit investment decisions by predicting company fundamentals without needing to rely on traditional data sources. ESG-related data also provides a distinct way to capture how companies, within each sector and industry, are innovating and adapting to thrive as the economy transitions to carbon neutrality. This is just one of the many powerful alpha opportunities that can be uncovered with ESG data analysis.

Sustainable investing sits on the verge of a major inflection point. Now, investors are able to measure sustainability on a much deeper level than simple screens based on value judgments. The availability of new sets of data and the ability to measure sustainability in unique ways have contributed to an increased demand for ESG-aware investing.