• 12 July 2018

Alternative Data to evaluate companies according to ESG criteria

Alternative Data to evaluate companies according to ESG criteria

1024 392 FinScience

The latest ESG report for the first quarter of 2018 released by FinScience draws the attention to the positive jump concerning the Environmental care of big tech companies (Apple, Facebook, Alphabet), Siemens, Toyota and Duke Energy Schneiders Electric, ABB LTD-REG and Panasonic - of Starbucks and JP Morgan when it comes to Social care, and of Alphabet with regards to Governance.

The acronym ESG stands for three applications of social sensitivity. The first one (Environmental) concerns the environment and the risks associated with climate change, greenhouse gas emissions, air and water pollution, wastage and deforestation. The second one (Social) includes gender policies, human rights, working standards, and other relations with civil communities. The third one (Governance) pertains to societal practices of good governance, including management’s remuneration policies, Boards’ composition, control procedures, and the conduct of the company and its management in terms of general compliance with the Law and its deontology.

The increasing relevance of ESG criteria within investment strategies is directly related to the interest shown by companies – and especially Institutional investors – towards these topics.

It is not just a matter of new regulations and compliance, nor is it a purely ethical question. It is rather a matter of expected returns. Some studies show that those who invest in entities abiding by concrete and transparent ESG principles are doing so because they expect to yield higher returns with lower risks. Hence, these investors intend to identify ESG factors that could be proper alpha-sources in the medium to long term. Nevertheless, the identification should occur before being incorporated within the market prices.

Therefore, the real challenge is being able to properly measure a company’s right ESG factors.

Having said that, all currently existing indicators suffer from the major flaw of being based primarly upon a company’s self-declared data, leading to heterogeneous standards which make the indicators barely useful for any real comparison.

To mitigate this problem and to come up with the best “chemical formula”, it is recommended to consider, alongside traditional datasets, also the new molecule of Alternative Data. The latter represents an unstructured, albeit public subset of Big Data with valuable impact on a financial level as well. Alternative Data comprises for instance all data that originates in social media platforms, blogs, forums, e-commerce platforms, maps, and more. Alternative Data makes it feasible to track not only those signals which already have significant financial impact (main signals), but also weak or emerging signals, with a bottom-up approach. The latter – if properly analyzed and weighed – provide valuable insights concerning developing financial trends not yet fully explicit but already having the right premises.

Each informative signal can be transformed into a number of indexes of popuarity and sentiment, which might be deployed to evaluate companies from an ESG perspective.

“The use of Alternative Data and FinScience’s proprietary metrics – according to Alessandro Arrigo, co-founder and General Manager – bring three different advantages: broader coverage that is not limited to companies that disclose their reports only nor to their procedures; adaptability to every company type, and not only to those within the same industry; existence of historical data that allow to compute single factors’ historical and predictive returns”.

The use of Alternative Data implies an algorithmic approach to digital information, and requires specific skills and unique expertise. The fact that the data is publicly available does not automatically mean it is also easily available. That is why FinScience is composed of a team of specialists who are able to cover the entire Alternative Data value-chain. Indeed, it is actively involved in every single phase of the chain: from the initial and smart data-sources’ selection, to the data cleaning and processing phases. The team then applies semantic algorithms (NLP) and machine learning techniques to build proper Popularity and Sentiment indexes. These indexes concern any informative signal – ESG included.
Said processes are scaled up: over 500k new alternative arguments are being analyzed on a daily basis.

Guide to Alternative Data for Sustainable Finance 2018

Data hardly matters unless you have the right competence to interpret it. For this reason, FinScience entered into a strategic partnership with the Centre for Law and Finance of the University of Genoa and its founder, professor Guido Ferrarini – one of the world’s leading experts on Governance topics, and currently a cholar of the latest ESG movement. This partnership led up to the publication of a Guide to Alternative Data for Sustainable Finance, followed by several ESG Alternative reports available on a quarterly basis (download here).

“Since its constitution in 1996 – as declared by Professor Guido Ferrarini – the Genoa Centre for Law and Finance stands out for its concrete research activities concerning business. FinScience has helped to discover a vein of ESG in the mine of Alternative data. We work, thus, together on a daily basis to extract information value for investors and to improve reporting and communication tools for business entities. We are firmly convinced of being only at the beginning of a path that is sustainable…and alternative.

The report which has been recently published, relative to the first quarter of 2018, highlights several different factors having an impact on ESG topics. These topics might be perceived as risks – as well as opportunities – from a business perspective.

From an environmental point of view, FinScience has recorded increasing awareness towards the fight against plastic, a topic tightly connected to the Blue Economy. At the same time, China is allegedly stenghtening its leadership role within the industry of renewable energies, whose prices are being drastically reduced to become convenient and accessible to the market – making them an unavoidable choice for developing countries. The strategy is with no doubt antithetical to Trump’s administration. However, big oil companies in the US such as Shell, Exxon, Chevron, BP, and ConocoPhilips have started to pay the price for their past strategies due to the new global movement promoting a switch to clean energies. Amongst all, Shell stands out for its newest green initiatives – a clear attempt to comply with global regulations. Big tech companies (i.e. Apple ,Facebook, Alphabet) and other industrial titans such as Siemens, Toyota, Schneider Electric, Abb Ltd-Regg and Panasonic, and Duke Energy excel as well in this landscape.

ESG Report Q1 2018 from Alternative Data

With regards to Social, mostly-discussed topics concern the scandal surrounding Facebook in the field of data protection and privacy, and the questionable choices of the UK government related to human rights. A keen interest in diversity themes is also present (for which JP Morgan stands clearly and positively out), as well as discrimination in the workplace and employee wages questions (Starbucks is in a positive pole position).

As far as it concerns Governance, an increasing awareness towards the fight against corruption in the US, Cybersecurity (Alphabet’s launch of Chronicle, in particular), conflicts of interests (e.g. with particular reference to Coca-Cola’s sponsored researches), insider trading, and tax evasion must be recorded.

The huge potentiality lying within FinScience’s activities is there for other companies as well

The intention of the european legislature is to turn the integration of sustainability and companies from a mere and formal compliance requisite into a real transparency duty and a process comprising three main phases: strategy, reporting, and communication. First of all, the company should understand how to incorporate sustainability in its core-business (indeed, it is not mere philanthropy). An excellent example is Pirelli, which is modifying its entire tyre production to enhance the performance of electric vehicles, saving (and recycling, if possible) whichever material used in the production. The company should then be able to report and evaluate the commitment and the effect of its sustainable strategy in all of its non-financial reports ( and now in full reports as well). And lastly, the company should be capable of communicating its work in a coherent manner.

FinScience plays an important role, in particular during the first and the third phases:

  • as regards Strategy – FinScience might be useful to businesses in the identification of sustainability trends and their most-related issues. Indeed, FinScience could make suggestions for any strategy and core-business evolution in the long run;
  • as regards Communication – FinScience might evaluate its effectiveness by measuring the sentiment connected to all initiatives theretofore undertaken.

This applies as well to small enterprises and non-listed companies, which might exploit FinScience’s software solutions and ESG services in order to raise capital or exit – even without having to comply with any specific obbligation.

FinScience is a data-driven fintech company founded in 2017 by Google’s ex-senior managers and Alternative Data experts, who have combined their digital and financial expertise. FinScience, thus, originates from this merger of the world of Finance and the world of Data Science.

Proprietary AI algorithms allow to interpret and weight alternative data for investment purposes:

  • Select strong and weak signals, both regarding companies and specific topics enhancing financial decisions (long term alpha generation).
  • Build Alternative Investment Indexes from a Smart Beta perspective, redefining traditional taxonomy.
  • Elaborate Portfolio Management models and Investment Strategies on different financial assets, leveraging both alternative and financial data.