Data is the biggest roadblock for widespread ESG adoptions.
Clients want to know that they aren't backing companies hurting the environment or on the wrong side of the racial and gender inequity discussion. But so far governments, specifically the US, and their regulatory bodies have been slow to enact disclosure requirements for public companies, leaving ESG investors searching for answers on their own.
"There's very little mandated disclosure of ESG related data worldwide," Jeff Cohen, director of capital markets integration at the Sustainability Accounting Standards Board, which has worked to get companies to sign onto uniform reporting standards.
At BattleFin's recent virtual conference with Amazon Web Services, Cohen said the lack of disclosures means "companies can control their own narratives."
This is where alternative data has entered the fold to fill the gap. Clients of hedge funds, especially public-facing institutions like endowments and pensions, are desperate for investments to be proud of, and hedge funds are being asked to prove that their portfolios are truly meeting ESG standards.
These endowments and pensions are already facing an uphill battle when it comes to finding managers to trust on ESG. A survey of 256 institutional investors by consultant bfinance found that more than 80% of institutional asset managers said getting consistent ESG reporting across asset managers and asset classes was a challenge. ESG-focused alt data then becomes a way for these hedge funds to prove their sustainability-centric pitches.
These money managers are already using alternative data for everything from tracking what stocks retail traders are talking about on Reddit to which stores are getting foot traffic as COVID restrictions open up. Now, a wave of data providers are focusing on finding companies' environmental touchpoints and social and governance stats.
Waste Analytics, for example, tracks how oil and gas companies dispose of waste, where these companies do it, and how much waste is being produced. Paragon Intelligence created a new product last fall to rank and quantify executive teams to find the firms with top governance rankings. Natural-language-processing alternative data firm RavenPack tracks and creates sentiment scores for public companies based on thousands of news sources and social media posts, identifying the companies scoring highest on ESG metrics with consumers.
"If you're a fiduciary, you need to be looking at ESG data and risks," said Jeff Gitterman, cofounder of ESG-focused Gitterman Wealth Management, at BattleFin's conference.
Vendors increasingly are finding that having an ESG offering leads to a quicker contract with hedge funds and other asset managers.
While alternative data has more users than ever, the entrance of large players like Bloomberg and Blackstone into the once-niche space has put margin pressure on long-time players and new entrants alike. Shortening the lengthy interview and vetting process with a hedge fund then can be the difference between a new paying customer and closing down for good.
Peter Greene, of law firm Lowenstein Sandler, told the BattleFin conference that vendors are asking him "how do I show my client base I'm ESG-friendly?" to help speed up the conversion from prospect to paying client.
"Your data needs to be ESG driven, but that's not enough. You need to be able to explain yourself and show your methodology," he said.
"I think we soon are going to start to see the buy-side demand that the data vendors make certain representations about what their ESG policies are early on in the sales process."