In this piece we will look at:
A new financial, banking and insurance industry survey takes on the challenge of discerning how important ESG data is to corporate America, and Britain’s business leaders. As well as how it impacts:
- The decision-making process
- Investors, and board member reporting
- Bottom-line results, and profitability
ESG survey executive summary
Here are the key survey numbers:
One: 49% of US and UK survey respondents stated that their organizations regularly change business decisions purely based on ESG data considerations
Two: The top-three ESG data sets organizations focus on are: environmental practices (69%), organizational diversity (64%), and corporate governance (64%)
Three: 95% of survey respondents in the US and UK say that their organization takes the ESG performance of its suppliers/vendors into account when doing business
Four: On average, US survey respondents said that just over three-quarters (76%) of their organization’s investment decisions are impacted by ESG factors; for UK respondents, it was 67%
The Environmental, Social and Governance (ESG) datasets driving business leaders
We showed the ESG survey results to Douglas Laney, Innovation Fellow with the consultancy West Monroe, and University of Illinois professor of ‘Infonomics’, this is what he had to say on the matter:
“Not only are companies basing their own investment decisions on ESG factors, but investment, private equity, and venture capital firms themselves increasingly are factoring in ESG performance metrics in the companies they choose to invest in. Moreover, many companies are scrambling to determine how to source internal and external data to generate trustworthy metrics and reporting required for the issuance of sustainability bonds.”
Let’s take a deeper look at this.
Use cases, and Business outcomes
Private Equity fund managers – Have started to understand that many businesses’ target audiences are millennial consumers who put social, and ecological issues at the core of their consumption choices, and habits. That is why many PE firms are looking to invest in businesses that are in tune with ESG best practices, and are perceived as such. Companies that aren’t can also be viewed as an investment opportunity, assuming said company has the basic characteristics to help it become ‘ESG friendly’. This can be utilized to increase the company’s value in the mid to long-term, as part of an effort to structure a ‘concrete value-added exit strategy’.
Alternative ESG datasets that are providing PEs with a competitive information advantage include:
Target audience social sentiment – By monitoring social media, and forums for brand mentions, investors can discern positive/negative sentiment around ESG concerns. One qualitative example would be conversations on LinkedIn around Unilever’s new ‘world-first paper laundry detergent bottles’. To a PE investor, this would actually be bad news because they could not theoretically add value to this corporation by leveraging an ESG-first approach.
In terms of this use case, identifying ‘negative social sentiment’ around harmful production methods, on the other hand, would mean that this company is not doing enough in these areas, and value can be added both in terms of operational practice, and target audience brand perception.
Asset managers– Especially those who have their bonuses tied to Sustainable Development Goals (SDGs) need to ensure that the investments are aligned with their investors’ values, and as such need to be able to pick companies that are not doing harm to the environment, yet are still profitable enough in terms of their bottom line. A good example of this would be an asset manager looking to invest in a building materials company. Said company provides wood from South America to the North American housing market, claiming to have a sustainable deforestation/reforestation plan in place.
Alternative ESG datasets that are providing asset managers with the tools to ensure ESG-compliance:
Real-time alternative data in the form of satellite images could be the key here in terms of helping asset managers independently discover if specific projects meet deforestation limits, and if planting (of new trees) quotas are being met. This can help both in terms of whether or not your firm decides to invest in a prospective company, as well as being useful for investors to see in quarterly reporting.
Insurers– At its core, the insurance industry is all about risk mitigation. Looking at ‘industrial insurance’ as a case study, one can see a clear correlation between a company’s ESG-compliance score, and their level of risk to insurers (the higher the compliance, the lower the risk). ESG related incidents which may become an insurance liability going forward may include:
- A wrongful termination of employment based on age, race or sexual orientation
- Government/municipal fines due to illegal/polluting practices
Here is how alternative ESG datasets can provide insurers with the tools to identify early indicators of an industrial policy requester’s future risk profile:
Insurance companies can utilize alternative data in order to build a ‘corporate social profile’ in order to identify how diverse their hiring practices are, how open/accepting/supportive they are of ethnic/religious diversity.
– By collecting data points from a company’s social profiles, insurers can see how many people of color as well as how many women are currently employed at a company, or in leadership roles, for example.
– By crawling search engines, you can come across anonymous reviews of former employees (this exists on Glassdoor, for example), and discern if unlawful termination or discrimination appears to be prevalent.
– Collecting public legal records or even news stories can shed light on previous class action suits or litigation.
The bottom line
Awareness of ESG matters is an issue that predominantly concerns a younger demographic both in terms of consumers, and executives. Some of the higher ranking, C-suite executives have been thought of as being out of touch with these values. The aforementioned survey however shows that bankers, investors, and insurance professionals, at the highest levels, understand that they need to make ESG part, and parcel of their marketing, investment, and operational strategies, and decision-making processes. ESG is important to people, and people are crucial in helping companies achieve their bottom-line goals.