Big Data’s Role in Sustainable Investment
By Galen Lewis
We live in an increasingly data-driven world. For each person on Earth, 1.7 megabytes of data is created each second. Data is created in a myriad of ways, ranging from online purchases to phone calls, social media posts, and Google searches. The bustling field of “big data” refers to the diverse and growing group of organizations seeking to harness the insights that data has to offer. Its implications are powerful: 35% of Amazon’s e-commerce sales result from machine learning algorithms that use big data to recommend products to customers, and over 80% of the content streamed on Netflix is recommended based on insights from customer data. Beyond consumer applications, big data plays a similarly large role in advancing sustainable investment.
Through sustainable investment, investors incentivize companies to act in the best interest of society by allocating capital towards companies that are creating a positive impact, ultimately leading to sustainable economic growth. Sustainable finance can directly fund environmental innovation, as well. For instance, Apple recently issued $1 billion in debt to finance renewable energy projects, green buildings, and resource conservation efforts. Sustainable investing is destined to experience increasing interest in the coming years: Millennials are set to inherit $68 trillion in wealth by 2030, and 95% of this generation is interested in sustainable investing.
The single greatest barrier to sustainable investment, however, is the lack of robust data. Investors are often discouraged from investing sustainably due to insufficient data regarding the non-financial performance of investments. Corporate financial data is much more standardized and complete than sustainability data, making it easy for investors to pursue profit without regard for sustainability. Sustainability data can be broken down into three broad topics: environmental, social, and corporate governance (ESG). Unfortunately, it is difficult to use ESG data to understand the impact of companies. This challenge stems from a few different circumstances:
First, corporate sustainability reporting has major gaps. Not all companies report about sustainability, and those who do tend to publish reports annually. Various agencies assess the transparency and performance of companies regarding their sustainability, but their ratings and scores tend to rely on incomplete data that favor larger companies with more resources to devote to sustainability reporting.
Second, it is difficult to identify the ESG data points that are most important to individual companies. Organizations such as the Sustainability Accounting Standards Board (SASB) and the United Nations’ Principles for Responsible Investment (UN PRI) are working to solve this problem by providing frameworks that companies can use to guide and improve their sustainability reporting. Companies are complex and unique entities, so there is no single set of metrics that all companies can use to assess and improve their ESG performance. Acknowledging this complexity, SASB establishes sets of metrics that are most important to each industry. For instance, environmental risks are more important for retail companies with supply chains in high-risk areas than they are for technology companies that offer services. Data security, on the other hand, is a social concern that may be more important for a technology company that manages oceans of private consumer data. This framework for assessing the relevance of different ESG topics is publicly available via SASB’s materiality map. Institutional investors care immensely about ESG materiality, as ESG data can be used as a toolkit for identifying financially significant ESG risks, trends, and opportunities.
Difficultly, ESG materiality is too complex for even an industry-specific set of metrics. For example, Disney and Netflix both compete in the media industry, but they do not experience the same ESG risks. With its theme parks accounting for 41.3% of its revenue during Q1 of 2019, Disney has much more of a physical presence than Netflix does. Therefore, pandemics and natural disasters pose much more significant ESG risks to Disney than they are for Netflix.
Furthermore, ESG assessments suffer if data are not up-to-date. For example, SASB does not deem data security to be very relevant to the hotel industry. However, when Mariott was fined $123 million in 2019 following a data breach that exposed over five million guests, data security instantly became of the utmost importance to the entire hotel industry. Evidently, materiality is dynamic and varies on a company-to-company basis.
There is hope for sustainable investing’s data challenge, as rapid and significant progress is being made toward assessing the impact of companies. Many technology companies are integrating unstructured data into ESG assessments. To do so, online news data and social media data are analyzed to keep investors updated with the latest information relating to a company’s ESG performance. Imputation, web-scraping, and other data creation methods are being used to mine ESG data to assess companies. Moreover, artificial intelligence is being used to identify and predict ESG risks.
Data and technological innovation has the potential to help investors understand the impact of their portfolios. If the data analytics industry continues to make rapid progress on the ESG front, then big data can be as powerful for sustainable development as it is for Amazon and Netflix.