Written by Jamie Botha, Head of Global Partnerships at DataEQ.
While the term “ESG” was only officially coined by the United Nations in 2004, the past two decades have seen Environmental, Social and Governance factors become increasingly mainstream. With this, there has been a gradual transition from a voluntary regime for companies around ESG issues, to one that is more regulated and compulsory, involving greater transparency and disclosure through reporting.
As this regulatory environment evolves, there is growing debate around the type of data used to benchmark companies’ ESG performance. Historically, ESG metrics have been based primarily upon a company’s internal, self-declared data, which can raise concern around their validity and cross-comparability across businesses. This is because internal data is inherently partial, with the nature of its disclosure being closely tied to the specific reporting framework adopted by the company. Since these frameworks are usually unique to each organisation, it has made the task of benchmarking against peers and industries more challenging.
Traditional data vs. alternative data
With this growing opinion that measuring ESG compliance solely through “traditional data sources” could result in an incomplete assessment, the use of alternative ESG data is gathering momentum. While traditional data is exclusively produced by companies themselves, alternative data is generated by external sources that sit outside the company in question.
Alternative data can be extremely useful to get a more complete picture of a company or sector. While it used to be quite costly to collect and analyse due to its unstructured nature, this is no longer the case due to advanced methods for collecting alternative data at scale, combined with new technologies in machine learning and computation.
Why is alternative data important for ESG compliance?
While traditional sustainability scores and company-produced metrics provide a solid and important starting point for assessing a company’s ESG performance, these systems of measurements provide a static view. In contrast, alternative data, with its real-time nature, can deliver more dynamic and multidimensional insights in a field that is constantly changing and evolving.
Alternative data also makes it possible to track not only those signals which already have a major impact on a company – known as “main signals” - but also “weak” or “emerging signals”, which are data points that indicate considerable change could be underway. The latter, when properly analysed and weighed – offers valuable insights into developing macroeconomic trends that could significantly impact a business model, operations, or industry environment down the line.
To ensure that the full picture of any company or sector is obtained, alternative ESG data is increasingly being used in conjunction with traditional ESG data, not as a replacement. By combining the two types of data together, regulators and compliance officers can leverage the strengths of both strategies while mitigating the risk of using each strategy in isolation. To do this, it is critical that regulators leverage the most appropriate technology and infrastructure to ensure the best available data is being utilised.
Social media as a leading alternative data source
Social media offers a vast untapped data pool which can be structured and analysed in real time, delivering immediate feedback to stakeholders around key ESG themes driving negative and positive interactions with a company’s business practises, initiatives and policies. Given the ubiquity of these platforms, they offer an attractive source of alternative data to evaluate ESG compliance.
Challenges and opportunities
While the use of social media data in ESG evaluation offers considerable benefits, it also presents challenges, including data volume, complexity, and the need for advanced analytics to extract meaningful insights. Additionally, concerns regarding data privacy, consent, and representativeness must be carefully navigated.
Nevertheless, the integration of social media and other alternative data sources into ESG assessment frameworks represents a unique opportunity to enhance the accuracy, relevance, and timeliness of ESG evaluations. As the demand for robust ESG compliance continues to grow, the ability to harness a diverse range of data sources will be critical in driving sustainable and socially responsible business practices.
Holistic reporting
To achieve a holistic view of ESG compliance, it is recommended that companies use alternative ESG data in conjunction with traditional data. This integrated approach allows for leveraging the strengths of both data types while mitigating the risks associated with relying on either in isolation. The critical challenge for regulators and compliance officers lies in adopting the appropriate technology and infrastructure to harness the best available data, ensuring a comprehensive and accurate assessment of ESG performance.
By embracing this multifaceted approach, the regulator and businesses alike can obtain a more nuanced, real-time understanding of a company's ESG footprint, driving forward the agenda for sustainable and responsible business practices in the decades to come.