Alternative Data: How Tweets Make Sustainable Investing Easier


Alternative Data: How Tweets Make Sustainable Investing Easier

When traditional corporate reporting reaches its limitations, alternative data can provide answers: What about environmental compatibility? What do customers really think? Does a crisis loom? Credit card transactions, weather data, social media, and the like reveal more than you think.

In 19th‑century England, a common tactic used by British crooks was to rob waiting passengers in Paddington Station and then abscond on a train. The gang of thieves could get off at the next station undetected because in those days, no means of communication were faster than a train. One day, though, the telegraph was introduced. Police could now notify the next train station and organize an arrest.

Having the right information at the right time has always been as valuable as gold, and today that’s even literally true: Forbes recently ran a headline trumpeting that “Information Is the New Gold.” The US magazine for investors argues that today’s new means of acquiring and analyzing data harbor greater potential than the precious metal. Staying with the metaphor, Forbes declares that data is the “new gold standard.”

Alternative Data Is a Billion-Dollar Market

There is, in fact, more information than ever today. Humanity produced more data in a single year in 2021 than it generated cumulatively from the dawn of recorded history to 2016. Moreover, investors are increasingly taking into account in their investments many factors that can’t be found in traditional corporate reporting, but which instead lay hidden – decentralized and unsorted – in the vast flood of digital data. The catchphrase that merges these two trends is “alternative data,” i.e., information that stems from other, alternative sources. In late 2019, SIX already predicted that alternative data would take root as a key basis for making investment decisions in a white paper titled Data, the Future of Financial Information.

But from where exactly does this alternative data originate? According to a study by US-based market research firm Grand View Research, there are a number of very different main sources (see also box): credit and debit card data, e‑mail receipts, geolocation records, satellite and weather data, internet and app usage as well as data scraped from the Web, and social media – more on which later.

The study says that the global market for alternative data is currently valued at 2.76 billion US dollars and will grow at a rate of 58.5% per annum to almost 70 billion US dollars in 2028.

Alternative data offers investors two benefits. On one hand, investors can put the information to use in the everlasting hunt for alpha to outperform the market (alpha measures how well an investment performs compared to a benchmark): Credit card statistics for a department store chain enable conclusions to be drawn about its business trend, geolocation records reveal which fast-food chains are in or out, and weather data helps to gauge the performance of ski resorts or amusement parks.

On the other hand, more and more investors want to know how socially acceptable their investments are. This is typically measured along environmental, social, and corporate governance (ESG) dimensions. But since ESG data isn’t included in conventional corporate reporting, alternative data is needed to glean ESG information.

Focus on ESG Data

One supplier of such data is Orenda. The Canadian startup company does high-frequency tracking of how companies are talked about on social media in real time.

It’s 7 a.m. in Ontario, and Tanya Seajay, the founder and CEO of Orenda, cheerfully logs onto our Zoom call. Question: “How do you explain to your children what Orenda does?” Reply: “My kids don’t listen to me anyway,” she laughs and continues: “My mother, on the other hand, does. I would tell her that we supply alternative data to financial institutions so that their customers can make better investment decisions.” Specifically, she says, Orenda’s software analyzes how selected topics are being talked about on Twitter. More than 10,000 publicly traded and privately held companies, but also countries and industries, are on Orenda’s radar screen at the moment, she adds. Orenda analyzes an array of different indicators, but its main focus is on ESG data.

The burden of proof often gets reversed on social media: There’s a presumption that allegations are true until they are proven false.

Tanya Seajay, CEO Orenda

The GameStop stock hype; the campaign against Facebook that saw a number of large corporations pull their advertising from the social network; the image of the pharmaceutical companies that developed COVID-19 vaccines. In all of those cases, the indicators from Orenda exposed early on that something was brewing in cyberspace that later had very tangible real-world impacts.

Seajay says that reputation has always had a big effect on a company’s stock price, but it heretofore had been very difficult to gauge collective sentiment. “Today, though, we have a wealth of data and are able to analyze it using artificial intelligence,” the former journalist explains. Another advantage, she adds, is that alternative data is generated constantly and doesn’t appear just once every quarter.

The Value of Fake News

Orenda concentrates on using Twitter as its data basis. The microblogging service is more reliable and cares more about protecting data privacy than other social networks, Seajay says. Moreover, the data from Twitter is more informative, for instance, than credit card data, she adds. And how does Orenda deal with fake news? “It may have a bad rep, but fake news actually is extremely valuable for investors because it says a lot about a company’s image,” Seajay explains. “We could filter it out, but then our indicators would lose predictive power.”

Expansion of ETF Data Offerings

SIX strengthened its ESG (environmental, social, and governance) and alternative data offerings by acquiring a majority ownership stake in Orenda. SIX now has also expanded its data offerings on exchange-traded funds (ETFs) through its acquisition of Ultumus: The international index and ETF data specialist, headquartered in London, covers 7,700 ETF products, which amounts to 95% of the market. In combination with the core capabilities in trading, post-trading, and data-related services, this leading position enables SIX to have a hand in shaping the growing ETF market. Clients of SIX can now expect even greater transparency and efficiency.

SIX acquired a majority ownership stake in Orenda in early 2021. Marion Leslie, who heads the Financial Information business unit at SIX, stresses that “in Orenda, we have found a partner that possesses unique expertise in alternative data, ESG data, and data science.” The acquisition will open up new possibilities in the growing impact investing market, Leslie says.

“And it enables us, in turn, to reach a much broader global customer base,” Seajay adds. “At the same time, it gives us an opportunity to develop new solutions that combine the enormous securities database of SIX with Orenda’s specialty expertise.” SIX will launch its first product with Orenda later in 2021 – alternative data from Orenda will then be available on SIX iD, the financial data display from SIX.

“Perception is reality” was a mantra of Lee Atwater, the political strategist to Ronald Reagan and George H. W. Bush. The success of alternative data from social networks underscores that perception can become reality very quickly these days. Or as Tanya Seajay phrases it, “The burden of proof often gets reversed on social media: There’s a presumption that allegations are true until they are proven false.” In such a world, investors and companies are well advised to listen to the tweeting in the social media jungle.

Do you like this content?

0
0