We live in the fast-moving age of Big Data with Artificial Intelligence, Machine Learning and IoT revolutionising the global market landscape. Applying this trend to the financial markets, we observe rapid growth of its’ impact on shaping disclosure and hence trading strategies or investment decisions. A number of pioneering companies also apply new technology solutions to help Issuers and thus their investors to track Environmental, Social and Governance (ESG) or Sustainability factors of companies and link it to their long term financial performance.
To learn more about application of these new technologies in ESG integration into portfolio management we interviewed Dominic Godman from Arabesque – a global asset management firm that developed the pioneering S-Ray algoritm tool to measure sustainability of the largest publicly listed corporations and Tony Wines from Turnkey Group – an agile sustainability RegTech and Enterprise Technology provider for listed companies, investors and private equity firms to support their Sustainability/ESG regulatory reporting, due diligence process and track sustainability operational performance.
How does Arabesque integrate ESG factors into the investment analysis and decision-making process?
Dominic Godman, Arabesque: Arabesque S-Ray measures the sustainability of the largest publicly listed companies around the world. It is a unique analytical tool, which uses a combination of machine learning and big data to systematically combine over 200 ESG metrics with news signals to quantify corporate sustainability performance.
Our S-Ray technology takes this raw data and generates two sustainability performance scores. Firstly, our Global Compact Score is a normative assessment of how much companies operate in line with the principles of the United Nations Global Compact based on their four core principles of human rights, labor rights, the environment and anti-corruption.
Secondly, we provide a review of long-term financial performance by incorporating sector specific assessments across financially material environmental, social and governance (ESG) issues. Here we use a principle of materiality – meaning that we weight different factors within each sector because we recognize that they can have varying levels of salience to financial performance.
How do you ensure reliability of gathered data and ESG scores?
Dominic Godman, Arabesque: We gather data from 3 different core sources. Firstly – raw data coming from companies. The raw data we use constructs the baseline on ESG credentials for portfolio company. We cross-reference it with universal data provided by non-governmental organizations related to human rights, supply chain etc. Finally, we combine it with daily data coming from over 50,000 news sources in 20 languages. By combining these three, we are able to gain a powerful and holistic understanding of a company’s sustainability profile. It gives us additional insights on risk in the portfolio, which also helps to achieve financial performance.
To account for gaps and inconsistencies, we ensure the data is cleaned daily. All inputs are subjected to a set of data quality checks, and poor-quality data gets discarded. If there is insufficient data, then a company is simply not scored. However, in time we aim to have enough quality data to score every listed company in the world.Tony, what are your best practices to help Issuers to help Investors integrate the best ESG data into their portfolio?
Tony Wines, Turnkey Group: Turnkey, through its SaaS RegTech and Operational Enterprise Technology Solutions helps companies to respond to their regulators and investors’ Sustainability/ESG reporting requirements. Acting as a technology solution between issuers and their investors’ portfolio allows Turnkey clients to understand and respond to data and reporting challenges of both sides of the conversation. The most common barrier in ESG integration reported by investors is lack of material ESG data disclosed by companies, inconsistency in data collection and limitations to comparability of this data.
Turnkey’s SaaS RegTech and Operational Enterprise Technology helps to solve this issue by embedding a standardised API driven data collection and reporting process. Turnkey’s advanced analytics allow clients to benchmark the ESG credentials of portfolio companies and link their sustainability KPIs to financial performance. This way the tool is beneficial both for investors to achieve transparency of data in their entire portfolio, as well as to the companies to track their own sustainability performance and use it to optimize their operations, generate cost savings an reduce risk throughout their supply chains.
The biggest concern especially for small and medium size companies when embedding sustainability is usually cost and ROI. A sustainability strategy should be a profit centre for their business, not just necessary to respond to investors’ or stock exchange reporting requirements. Turnkey Group helps businesses achieve a full scope of benefits from Sustainability/ESG and for investors to achieve transparency of data in their portfolio, which helps to optimize valuation.
Do you apply this approach when working with companies, both big and small?
Tony Wines, Turnkey Group: Listed Companies usually have more mature sustainability policy in place; however they face similar challenges around the data collection process and ensuring data transparency across multiple facilities. Turnkey’s SaaS RegTech and Operational Enterprise Technology Solutions are highly scalable and help SMEs & MNCs to have visibility of their sustainability risks and costs through real time data analytics and reporting across just a few or thousands of locations.
Turnkey Group also helps companies manage their supply chain sustainability impact. This is a challenging area for many of them and an extremely important aspect for investors. The trap that many investors and companies fall into is ignoring what could happen if they do not have full transparency of their sustainability performance. In recent years, we have witnessed many companies facing critical consequences due to increased product cost through environmental or social risks. We help both companies and their investors to mitigate this risk via ensuring ESG data transparency via real time data analytics and dashboards to identify areas of risk and cost.
The combination of Big Data, AI and Machine Learning technologies based on ESG metrics and trends ensures data reliability and transparency and provides additional insights that allows investors to better mitigate their risk and optimise performance within their portfolio of accounts.
Brought to you by: Turnkey Group
Interview provided by: Tony Wines, CEO of Turnkey Group and Dominic Godman, Partner at Arabesque Asset Management
Marta Bojarzynska runs marketing at Turnkey Group
This article was sponsored by Turnkey Group and RI editorial staff were not involved in the creation of this content