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Social investing and the search for ESG data

Andrew Breton
Andrew Breton
Head of Quant Analytics and Research, Elsen

Socially responsible investing is on the rise as more studies highlight the significant value on offer. Where can investors access the ESG data and research they need to support the search for alpha?

  1. Several studies report that socially responsible investing (SRI) adds significant financial value for organizations and individuals.
  2. When valuing companies in the SRI space. knowledge-hungry investors are demanding a robust and quantitative approach to environmental, social and governance (ESG) data.
  3. QA Point powered by Elsen measures a company’s performance on key ESG data and research areas, such as climate change and corporate governance.

The idea of Socially Responsible Investing (SRI) has been around, in its current iteration, for more than 50 years. However, the idea that social and ethical issues should be considered when backing an enterprise have been part of human culture far longer.

According to The Balance, today’s socially responsible investing or impact investing can trace its roots back to American Methodist community’s avoidance of partnering with “vice” industries — alcohol, gambling, etc. — and, maybe even further back in history.

The reality of socially responsible investing

The one thing preventing socially responsible investing, as it has evolved, from becoming more popular has been the stigma that SRI does not lead to profits.

While many investors believe benefits are gained by backing organizations that reflect their beliefs about the environment, sustainability, human rights, workers’ rights, and the like, they don’t think it is as healthy for the bottom line as “conventional” investing.

A recent study showed that most investors believe that SRI funds will underperform conventional funds. It also found that only 17 percent of socially responsible investors and 15 percent of non-SRI investors expected to see higher returns on SRI versus conventional funds.

However, the data reveals a different reality.

Over the past five years, the Domini 400 Social Index — also known as the MSCI KLD 400 Social Index — has just slightly outperformed the annualized return of the comparable MSCI USA IMI Index. The Social Index saw a 10.04 percent ARR compared with the USA IMI’s 10.02 percent ARR through Nov 2018.

Social investing and the search for ESG data

ESG investing strategies

In the past couple of decades, a different, broader approach to SRI has developed which places an emphasis on environmental, social, and governance issues.

In 2005, a paper published by the UN Global Compact and endorsed by a number of leading financial institutions paved the way for an approach to impact investing that balanced both ethical and social responsibility in investing and a path to profitability.

The authors of Who Cares Wins and the institutions backing it concluded: “The way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully.”

Who Cares Wins also highlighted that those companies that perform better with regard to these issues “can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate.

“Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”

Following this landmark moment in responsible investing, came the launch of the UN’s Principles for Responsible Investment as well as the Sustainable Stock Exchange Initiative. Both set the precedences for reporting, data sharing, and guidance for ESG investing.

ESG investing strategies have grown in popularity since, in large part due to studies reporting that responsible, impact investing, in particular ESG investing, added significant financial value for organizations and individuals.

A 2016 report on the responsible, sustainable and impact investment market found that it had ballooned to represent US$8.72 trillion of investments under professional management — one-fifth of the entire market and a 33 percent increase over two years — out-performing expectations.

Social investing and the search for ESG data

ESG data and research tools

Today, investors want a clearer understanding of all the key factors — data, reporting, research, and overall performance with ESG issues — when making decisions on how to add ESG companies to their portfolio.

Many organizations are implementing new information assessment and scoring tools to value companies in the ESG space. However, few have the robust, quantitative approach demanded by savvy, knowledge-hungry investors looking into ESG investments.

This is why Refinitiv and Elsen have partnered to bring easily-accessible ESG data to QA Point Powered by Elsen.

QA Point allows professional investors to leverage data and implement quantitative strategies to make more informed investment decisions — regardless of their level of technical knowledge or sophistication. This provides more clarity into the ESG market for investors and organizations seeking to include impact investments in their portfolio.

Using AI and Factor Testing to Find Multiple Sources of Alpha

QA Point and ESG performance

QA Point’s ESG data measures a company’s performance, commitment, and effectiveness with key issues such as climate change, diversity, human rights, business ethics, and corporate governance. It also factors in controversies related to ESG that may detract from a company’s overall ESG score and performance.

As more investors commit to balancing profit and responsibility with their search for alpha, those with the more complete data and knowledge of where companies stand in terms of their commitment to ESG factors will be at an advantage. Having the best tool to assess that will be vital.

Discover advanced quantitative investment strategies and data science with QA Point

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