How Technology Can Help the Markets Overcome the “ESG-data Conundrum”

Ali Curi: Markets Conversation is a new ION podcast where we discuss topics of importance to capital markets participants with product owners, subject matter experts, and industry leaders.

Steven Strange: The fundamental point of sustainable investing is its benefiting us and everyone for the future, the planet’s future, and that’s really what the goal should be.

Ali Curi: Hi everyone and welcome to Markets Conversation. I’m Ali Curi.

Ali Curi: Environmental, social and governance guidelines, ESG, help investors screen investment opportunities based on responsible corporate policies. On today’s episode, Steven Strange from ION Markets will explain how technology can play a significant role in helping the financial markets overcome the ESG data conundrum.

This data conundrum refers to the challenges of effectively collecting, analyzing and utilizing ESG data for investment decision making. Steven will also share some insight on why it’s important for these new processes to be in place and how asset managers can leverage cloud technology to manage this data overload.

Let’s get started.

Steven Strange, welcome to the podcast.

Steven Strange: Thank you. It’s good to be here.

Ali Curi: Let’s start with defining ESG in the context of investing. What is it and why are investors seeking ESG-rated opportunities?

Steven Strange: Yeah, it’s a great question. So ESG is a very broad subject, but to break it down in the context of investing, it’s essentially a non-financial framework of looking at sustainable investments.
So it looks at environmental, social, and governmental factors of basically, “should I or should I not invest in a company?” So traditionally, we may be looking at, you know, the financials, and that type of more traditional approaches. This is looking at sustainable factors of perhaps “what are the carbon emissions,” “what are the social policies,” “what are the diversity and inclusion in a firm?”

Ali Curi: Also, can you tell us what is greenwashing? What is it, how does it affect ESG in the investment space?

Steven Strange: So, “Greenwashing” in a basic, format is essentially claiming that you do great things for the environment or for sustainability in general. A great example that’s pretty topical this week: so Delta, the airline that most people would be familiar with, they’re having legal action against them for potential greenwashing.
So they’ve been claiming they’re carbon neutral. And people have investigated it going, “Are you really carbon net neutral? You’re flying airlines throughout the world. How did you get to that statement?” So it’s still, you know, it needs to be investigated as to what the outcome of that would be. But it’s an example of potential greenwashing. Firms are stating, “This is what we do and we do it really well.”
And it’s basically validating. Well, is that true? You are just claiming that you do great things for the environment. Your carbon emissions are low, but are they really true statements or are they marketing messages instead?

Ali Curi: Tell us a little bit about what is the “data conundrum?” How does it affect the current process of investing?

Steven Strange: The greenwashing actually is an interesting example of that. So how do we validate and prove that companies are truly sustainable? So there’s lots of different factors. As I said, it’s a broad subject when we’re breaking it down. Environmental factors cover hundreds of different things. Social factors, as I mentioned, have hundreds of different metrics behind it.

Steven Strange: So when we’re looking to validate whether, a company is truly sustainable, we need a lot of different data sets, and the conundrum really comes in the fact, where do you get this data from? How do you analyze these companies? Do you let them self-analyze, self declare? Disclose their own information? Do you have external analysts that provide these reports? Which you have both of these. Do you have other, own investment firms actually doing their own analysis? So you get to this point of hundreds, if not thousands of data sources, and huge amounts of data to process. So the conundrum is then what do you do with that and how do I really make sense of it?

Steven Strange: It’s a challenging, complex subject to then be able to easily say, “Company X is sustainable,” and it gets a little more complex. I like to think about it as deep data. So if you take very large multinational corporations, an oil company for example, who are multinational and global, it’s very difficult to break it down to say they have a sustainability rating or an environmental rating of X because there’s so many different factors.

Steven Strange: They might diversify. They might have other, industries that they’re responsible for. They might be doing environmental things, so trying to sum it up to a single number for a single entity, is nearly impossible. And that’s really what ,the complexity comes to.

Ali Curi: The ESG investment rush is creating a competitive environment for investors, what tools and more importantly, what data are necessary for investors who are looking at ESG compliant investments.

Steven Strange: So there’s a couple of things to think about here. So we have all the data sets that I just mentioned, and you can use that for your own research as an investment firm to say. Well, we have created a portfolio that is going to be ESG compliant. So we are gonna go to our investors and we’re gonna market it and position it to say, look, here is a fund that, will adhere to, ESG principles and these are the constraints we’re gonna put around that, particular fund.

Steven Strange: So that’s one way of doing it. But then you need to research, well, what am I going to, which, entities, which firms am I going to invest in to be able to comply with the constraints I’ve just, set out, or the guidelines I’ve just set out to my investor base. So you now then need to look at the data and the technology that you have.

Steven Strange: So as portfolio managers or researchers, analysts are trying to figure out, well, what should I invest in? Will it truly be okay? Or am I gonna breach these guidelines? That’s where the technology comes into play. You have to have a strong data network, and we can talk about a little bit more about that in terms of being able to ensure you have the relevant data and you’ve done the due diligence around that to bring that into the systems. But then you need compliance systems to check that. So you need to be confident as a fund manager that as I’m picking my stocks, investing and putting billions of dollars of other people’s money into these different firms that they are truly, sustainable and they meet those ESG factors.

Steven Strange: So you have to be confident in your technology. You have to be confident that the data has been sanitized and you have enough data in the system to be able to achieve that.

Ali Curi: Steven, you talked a little bit about compliance. Let’s discuss that some more. ESG has rules and regulations in place like traditional investments, but it’s also more than that.

Ali Curi: Can you tell us why the rules and regulations for ESG are different from traditional investments?

Steven Strange: Yeah, absolutely. So if we just have, an overview of what we mean by the traditional rules and regulations, there’s currently hundreds, if not thousands of regulatory rules, mandate rules that govern particular portfolios, but they can range from traditional type restrictions such as, I can’t trade in tobacco, I shouldn’t trade in gambling stocks, the credit worthiness of a company or the portfolio is not of a certain standard, things like that, that are pretty easily measurable. I tend to kind of risk exposure based tests saying, well, how much exposure do I have to a particular sector? So those ones are very well understood and are in place now, ESG, when you get into the complexity of the data I just mentioned, how do you have a single metric to determine what a firm at an entity level of how sustainable, how green, how social they truly are. How do you get that down to a single metric or a set of metrics, assuming you have all that data in place, and then how do you test it? So that’s where it becomes interesting and a little different. And then you’ve gotta remember as well, there’s always a moving target.

Steven Strange: So if a company discloses that the carbon emissions are of a certain number, last quarter, last year, do you then say, yes, that’s, a positive rating, but that’s gonna change? How do you keep on top of that? How do you measure that? That’s still true for that statement from before. So there’s such moving variables on a very broad, complex topic that you have to keep on top of that data and then overlay your testing to ensure on any given day, I make an investment.

Steven Strange: I am, truly compliant. So it’s, it’s just much harder than the traditional way of doing things.

Ali Curi: And speaking of data, how can a transition to the cloud help asset managers navigate the data conundrum associated with ESG compliance?

Steven Strange: Great question. So, when firms typically transition to the cloud, it’s part of a wider digital transformation journey.

Steven Strange: So, It is a cultural change. It is a very large transformation project that starts at looking at, well, what are all the use cases that we’re trying to solve? So Cloud is a great provider to be able to store all this data I’d mentioned in, so you can now access data, store it, bring in more data than you ever could before, versus traditional, technologies.

Steven Strange: So as firms are already on their cloud journey or migrating towards it, they can figure out, well, what is the data sets that I need? So I can store it in cloud storage, I can access it in real time, I can scale it up, and then I can leverage interoperability, which is the ability to then have all these different cloud applications talk to each other, connect with each other, and then distribute that information throughout the organization. So it’s one thing, being able to have all that data, having it in a meaningful way that has some context and distributing it to, whether it’s the fund managers, the relationship managers, the clients themselves, really is only possible with a modern technology infrastructure.

Steven Strange: And that really requires, cloud as a prerequisite. And then on top of that, what you need to be able to do with this is lots of different scenario analysis and scenario checks saying, “Well, what if I do invest in this firm and then it’s sustainability rating drops?” I need to do a lot of what if scenarios with incredibly large data sets.

Steven Strange: I need to be able to store that somewhere. That’s very expensive, but a cloud allows that to reduce costs significantly, and make the goals much more achievable.

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Ali Curi: SFDR disclosure rules. What can you tell us about those and how are they different in the EU, the UK, and especially in the US?

Steven Strange: SFDR was the first regulatory, restrictions that was put in place for sustainability and sustainable investing. So essentially monitoring ESG- type investments. SFDR is an EU regulation, so there’s a combination and of multiple different regulations and rules within that, but that governs EU investments.

Steven Strange: With the main purpose of ensuring firms are disclosing their ESG data points, like the carbon intensity, the carbon emissions that they may be using, and basically disclosing it in a consistent framework. SDR is the UK version, so the slight subtle differences, but basically it’s the UK’s version of being able to have that governance and regulatory control to make sure people are disclosing what they say they’re disclosing.

Steven Strange: And again, having a regulatory framework in place. And then the US in recent years, and actually there’s a number of rules that’ll be coming out, in this year. They have a set of similar rules, different because they’re only governing US investments, but really with the same goal set in place, there has been progressions with a task force for climate change and being able to focus on those type of rules.

Steven Strange: And then in the coming months, the SEC will be introducing a number of other rules. Again, with the principles of trying to disclose and monitor that companies are, what they’re saying is actually true and validating that there is some governance and oversight from a regulatory standpoint.

Ali Curi: In the US it’s been reported that the purpose of sustainable investing is being diluted, or in some states it’s outright hostile. These actions seem to be damaging progress. What role can technology play in these matters as investors try to keep up with these challenges?

Steven Strange: Yeah, this is a great question because what started off with a really great principle for ESG in sustainable investing is there is a demand.

Steven Strange: People are looking at the world we live in, the climate change, the globe and looking for the, to the future and then saying, well, actually I want to make an impact, and invest my money as an individual in things that are really gonna help the future of the planet, the future for everyone.

Steven Strange: So it started off with great goals, but as it’s scaled up and become a very complex, and as I mentioned before, broad subject, it is starting to create a divide. And what I mean by that, there’s difference of opinions. There’s a lot of stakeholders, whether that’s financial stakeholders, more recently political stakeholders, who are looking to state that should we really have so much regulation and restriction in place on these type of investments and they want to have less restriction. So just naturally it’s creating a divide. And I think because it’s become such a big subject and certainly been discussed at the highest levels and in the last few years, you just bound to have that tension.

Steven Strange: And I think sometimes, you lose track of what the objective was and the person at home who is trying to invest some of their money in their retirement, they just want to be able to invest in something that is sustainable. Now, to your point around technology, what can we do? I think the key piece here is to really accelerate transparency. So as I’ve mentioned multiple times, there’s lots of data. How do we understand it? What’s the context around that? But how do we make that transparent, not just to those portfolio managers, but to everybody. So if you look at your retirement fund and say, well, what have I invested in?

Steven Strange: You can drill into it and say, oh, actually that firm is doing what I would expect them to do. For diversity and inclusion or environmental goals, and you can actually see it and everybody’s upfront and transparent. I think that’ll take away some of the tension from the debate.

Ali Curi: What do you see happening in the near future with ESG investing? Specifically, how do you see emerging areas of technology, like say, AI and machine learning? How do you see them playing a part in managing ESG data challenges?

Steven Strange: So AI is already making great progress in this space. So as we’ve mentioned, this is all about data and analysis and research. So there’s an incredible amount of work that goes into this re manual perspective of reading reports, prospectuses and understanding how did I get to this point that I believe Company A is sustainable.

Steven Strange: So traditionally we had people had to sit there and read those reports and build their own analytical structures and models. AI has advanced that and allowed that type of work to be done much quicker. So there’s definitely a huge advantage of being able to leverage it. And certainly, people are, for that type of research.

Steven Strange: The interesting factor is does AI solve everything? Absolutely not in this example. Because it only has the same data that we’ve mentioned before. And yes, can interpret it and look at different factors in interesting angles, but the data still remains the underlying problem. And if that’s not right, then you can’t really expect the AI to solve those issues.

Steven Strange: Now, one thing that is interesting, that’s, we’ll see more of it is sentiment and seeing our companies really standing up to what they’re saying. Like the greenwashing example we said before. AI is interesting that it could actually read through quarterly reports or statements from CEOs and see are they consistently using the same language?

Steven Strange: Are they really truly doing that? Are they really focusing on the future or are they just saying some buzzwords at the annual meeting and that’s something that AI is quite clever at doing so. We’ll probably see more of it.

Ali Curi: Now let’s talk about career advice and productivity. What is some career advice you wish you had heard earlier in your career?

Steven Strange: This is a great question and I think when I look at it, often we just look to have major strides of improvement and big goals, which are important. But really, equally, spending some time on the smallest steps of how to improve productivity and just small steps and improvements on a daily or weekly basis is significant and extremely powerful to get to those goals that you’ve set out for yourself.

Steven Strange: And I think starting to do that as soon as possible is something I, I certainly wish I knew before.

Ali Curi: Steven, before we close out, what’s the one big thing you hope listeners will take away from this episode?

Steven Strange: I think it’s to not lose sight that sustainable investment is important and monitoring it and providing these frameworks and regulatory frameworks.

Steven Strange: It’s complicated and it takes time. The underlying date is constantly changing, so therefore regulations will change and it’ll cause delays and it will be costly. But we just shouldn’t get distracted by all the noise. Going back to what the fundamental point of sustainable investing is, it’s benefiting us and everyone for the future, the planet’s future, and that’s really what the goal should be.

Steven Strange: So my point there would be to not get distracted by the noise and remember the true intent of ESG. It shouldn’t be a marketing tool. Better way to improve the future for everyone.

Steven Strange, thank you for joining us today on the podcast. I hope you visit us again.

Steven Strange: Thank you very much for having me.

Ali Curi: And that’s our episode for today. You can follow ION Markets on Twitter and LinkedIn. Thank you for joining us.

Ali Curi. Until next time.