Commentary: Why data itself is a critical ESG factor

Sustainable investing is on a steady march toward the mainstream. Consumers, especially women and millennials, are increasingly demanding that exposure to environmental, social and governance factors be incorporated into their portfolios. And that's putting players across the asset management industry on watch: Total assets in sustainable investment strategies hit $12 trillion in the U.S. in 2018, up 38% from two years earlier, according to the US SIF 2018 Trends Report.

The trend's momentum was evident recently in the packed room at the fourth annual Sustainability Investment Leadership Council Conference in New York on May 9. A few of the topics on tap included digital innovation and sustainability, managing ESG exposure within global supply chains, the changing nature of regional regulations around mandatory disclosures — and, of course, data.

Especially in areas where ESG reporting isn't mandatory (like the U.S.), access to data on companies' exposure to ESG factors is extremely difficult to obtain. There are many data providers out there — think Bloomberg and MSCI — but they are largely reliant on voluntary self-reporting by companies, and often produce opaque, aggregate measures of sustainability or scores that aren't fully explained. They also generally don't provide the underlying data. So, if you are a financial adviser trying to create a custom framework, you're out of luck unless you have a team of data analysts to rake through filings and extract that for you — a luxury reserved for a handful of large asset managers with huge ESG mandates.

This is all pretty well known; adequate data is an issue within the sustainable investing realm. But another well-made point during SILC is that data itself and how it's treated is an ESG factor. That's because data, especially personally identifiable data, is proliferating through all aspects of business, and handling that data responsibly is a governance issue. While there is a great deal of talk around sustainability regarding the environment, it's key to remember that data will eventually become a bigger sustainability concern, explained June Choi, CEO of Serval Ventures.

The world is quickly moving to a future where data will be at the heart of every organization. That's going to enable incredibly tailored products and services; it's also going to create a ton of risk. Facebook's data privacy issues are a prime example of this — in fact, the company was recently dropped from the S&P 500 ESG index in part due to its opaque practices around how it collects and utilizes user data. Soon, many more companies will have similarly huge data troves they need to secure, and could face similar issues.

Cybersecurity and data privacy have always been a concern, especially from a reputational risk perspective; however, materiality frameworks like from the Sustainability Accounting Standards Board bring to light the reality that it's not just about dropping consumer demand based on reputation; there are also negative financial and stock performance implications when it comes to data breaches. Catching loose data privacy policies early on through techniques like natural language processing and artificial intelligence applied to news articles can protect companies and investors from considerable losses. This ability to detect areas of concern early on can also serve as a great impetus for activist investors who are looking to engage their portfolio companies in conversations about how they treat data.

It's also important to take note of data considerations when building out dedicated sustainability initiatives. Ms. Choi used smart cities as an example: If you are installing sensors to monitor traffic patterns and implement strategies that reduce car footprints, it's critical that the data is collected in a way that is secure, aggregated and anonymized. This extends to the use of technologies that enable better use of data. People in the AI community are talking about how to provide more transparency and social responsibility around the technology, Ms. Choi explained, adding that responsible use of AI and eliminating bias requires having enough people around the table to ensure that you have the right datasets, organized the right way, sourced responsibly.

The key takeaway is that data isn't just powering this movement — it's also an area that needs to be carefully accounted for within sustainability efforts. Some of this will come through data privacy regulation, such as Europe's General Data Protection Regulation, which came into effect in May last year. Jeffrey Yin, president of the SILC Club, said he thinks similar regulation will eventually trickle over to the U.S., where there is currently a hard-to-navigate patchwork of data privacy laws. In the next few years, we will see more uniformity, he explained, which will make it easier for companies to better comply. But it's likely to be the truly proactive companies, the ones that bake data privacy and security into their strategies now that emerge as leaders, as well as the most responsible investments.

Kate Drew is fintech research manager and Svetla Marinova is fintech manager at Grant Thornton LLP, both based in New York. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.