Article 19.3.2021

Master your ESG data

Gold mining from the rich sources of alternative data in finance might be challenging, yet it is rewarding. As there is a vast mixture of data sources and data available to investors with a sustainability mindset, it is increasingly important to have a comprehensive understanding of the methods behind the ESG data to make valid inferences to support the decision-making process. Master your data and it will become your competitive advantage.

Turning experiences into data is a lot harder than one might think. And interpreting our physical world into a unique set of statistics and data points to help us make better informed decisions comes with its challenges.  In finance, long and tested accounting data that follow formal frameworks such as GAAP or IFRS, have served to connect the dots between the financial performance of a company and a potential investment outcome.

In the age “of big data”, getting value out of large complex data sets is at the core of solving problems when new information is at our disposal. This makes connecting the dots challenging but at the same time exciting, as this opens room for innovative thinking between real world events and how that could impact an idea that you want to accomplish, for example an investment goal.

What is behind your ESG data?

For investors, ESG-related data is becoming increasingly important. Highlighting the crucial aspects of sustainability – Environmental, Social and Governance issues – ESG-data can be a decisive factor in determining whether a company is a lucrative investment.

Gerald Esono

Data, be it accounting or in alternative datasets such as ESG, are to some extent constructed based on judgements and formalized by frameworks that users could agree on. Hence, it is important to be aware of the boundaries between the “art and the science” when translating the full complexity of the world around us when codifying and contextualizing information in order to produce valid inferences from the data. To put this into perspective, the filling in of data gaps is a topic rarely discussed when it comes to the quality of ESG data, yet it is a vital piece in connecting ESG issues, such as climate change or board diversity, with investment outcomes.

Build your own internal analysis tool

How can an investor turn the vast amount of ESG data as a competitive advantage? At Ilmarinen, strong emphasis has been on building an internal data analysis tool and increasing our capabilities' for understanding ESG data during the past year. While building our internal ESG analytics, having the ability to break apart the rating models not only has given us a better appreciation of the nuts and bolts behind the ESG information, but also opened the exciting prospect of continuing to develop our ESG work by leveraging the hard work that has already gone into these datasets. Coming this far, collectively with our stakeholders, has not only better equipped us to continue enhancing our investment choices but more importantly helped us better define what ESG questions are material amongst the vast amounts of ESG datapoints.

Take an ownership of the ESG data

In our work with ESG data, acknowledging the different data filling methods such as a “rule-based approach”, “input-output model” approach or more computational demanding process that involve “statistical imputation” technics, you start getting a better understanding of the differences between ESG providers. Moreover, it is data imputation methods that directly affect rankings of companies, and depending on the assessment model being applied, similar E, S and G data inputs could deliver quite different ESG performance ratings. But do the inconsistencies of ESG ratings question the usefulness of the data? Not at all. In fact, it shows us the importance of taking ownership of our ESG data management capabilities in order to put context on issues that go beyond a balance sheet or income statement and thus create a better understanding of a company’s business model. By continuing to work on our ESG data capabilities, we hope that with time we would start seeing a baseline of indicators and metrics that will form a core set of ESG issues that we can fully draw upon as ESG data continues to develop.

The quality of ESG datasets does have its challenges but a lot of rigorous work has and will continue to go into codifying the complex characteristics of the world around us. Even if the data was perfect, at the end of the day it is still just information there to be used be it in basic or advanced ways. But as the world continues to change, there will always be new ESG questions to be asked, bringing with it the availability of new sources of data, increase collaborative opportunities and thus forcing us to change the way we invest.

Gerald Esono
Specialist, Responsible Investment, Ilmarinen

Ilmarinen will publish its Annual and Sustainability Report 2020 on Wednesday, March 24^th. The full report will be available in English, Finnish and Swedish. The report will include a new forward-looking climate data and analysis related to responsible investing.