The biggest change concerns the aforementioned growth in the vast quantity of data, particularly in the area of alternative data, which differs from traditional financial data such as revenue, earnings, debt load, outstanding liabilities, etc. that companies disclose themselves as part of their reporting. Alternative data, in contrast, is usually not financial data, but instead relates to things like traffic, the weather, communication, or energy consumption, for example. Alternative data can originate from a wide range of different sources such as social media, satellite imagery, road and transport users, and sensors. It contains information that is either interesting in itself or which enables a reanalysis of already existing data.
Sound abstract? Consider a concrete example: Foursquare is an app that lets users virtually “check in” at locations where they happen to be, such as at an airport or a restaurant. A couple of years ago, the CEO of Foursquare pretty accurately predicted the quarterly revenue figure for a restaurant chain. Its reported 30% slump in sales had already been portended by the behavior of the app users.
This example illustrates why people in the financial world are extolling the virtues of alternative data today. Alternative data, The Economist writes, harbors the potential to balance out the knowledge advantage that corporate insiders have over normal investors. You can read in blogs how “you can beat the DAX” using alternative data, and Swiss private bank Pictet calls alternative data “the key to achieving greater alpha in the future.” And financial market researcher Optima estimates the value of the market for alternative data at already USD 7 billion for 2020.
Customized Sustainability Indicator
Alternative data will become especially important for compiling ESG information. “The biggest obstacle to investment is that most sustainability reporting by companies is aimed not at investors but at other stakeholders,” the Harvard Business Review writes. ESG data has heretofore been missing in most corporations’ quarterly and annual reports, not because companies don’t want to disclose this information, but because they simply don’t or are unable to collect ESG data.
This constraint will disappear. The white paper by SIX envisages a world in which the quantity and depth of information know practically no limits, enabling investors to arrange their investments in alignment with their personal preferences. One investor perhaps might want to invest only in companies that vigorously promote gender equality, whereas another investor wishes to take action on environmental protection and climate change. Other investors perhaps would like to shun weapons manufacturers or coal companies.