Businesspeople who speak about social responsibilities are “unwitting puppets of the intellectual forces that have been undermining the basis of a free society.” No, this is not a quote from a raving presidential tweet; it is 50 years old and demonstrates that the debate about corporate social responsibility is nothing new. At the same time, it illustrates just how fundamentally the mood has changed. An economist who wrote something of that kind today would hardly stand a chance of winning a Nobel Prize like Milton Friedman did years ago. The quote above comes from his essay titled The Social Responsibility of Business Is to Increase Its Profits.
Various criteria have always had to be taken into consideration when investing money, but in the past it was mainly the financial return that stood in the foreground for everyone from retail investors to billion-dollar pension funds. Today that no longer universally applies, as evidenced by headlines and comments in recent months. Goldman Sachs, for instance, declared that it would no longer underwrite IPOs for companies with all-male boards of directors. State Street Corp.’s investment unit, in turn, plans to vote against the boards of major corporations that lag behind on sustainability standards.
BlackRock Chairman and CEO Larry Fink even went as far as to write that “we are on the edge of a fundamental reshaping of finance” in his influential annual letter to chief executives. “In the near future – and sooner than most anticipate,” he continued, “there will be a significant reallocation of capital.” Lastly, the Harvard Business Review trumpeted nothing less than an “ investor revolution.”
The Overview Effect
The astronauts of the Apollo 8 mission in 1968 were the first humans to ever gaze upon planet Earth in its full splendor. They described the supernatural change of perspective as a transformative experience. All of the space voyagers that have followed them, aboard the International Space Station, for instance (see photo), reported undergoing the same experience. They say that the view from above jarringly reveals the fundamental interconnections of life on Earth and the fragileness of our planet, and manifestly exposes the need for sustainable behavior. In the late 1980s, Frank White called this phenomenon the “overview effect,” coining the term with his book of the same title.
A holistic way of thinking, a sustainable outlook – investors, too, are increasingly calling for an overview of this kind, as the ESG example shows. Alongside conventional financial data, ESG investing also makes use of alternative data, which can come from anywhere: e.g. from social media, sensors, your smartphone, or – completing the orbit – even from outer space.
The satellite images in the gallery below invite you to change your perspective (All images in this post: NASA).
Sustainability investing is experiencing an unprecedented boom. The business magazine Forbes writes that the total volume of sustainability-linked investments is estimated to exceed USD 20 trillion, which equates to one-quarter of all assets under professional management worldwide. Sustainable assets feature different target attributes such as “impact,” “sustainable,” “value-based,” “ mission-driven,” or “green,” to name just a few. The abbreviation ESG, which stands for Environmental, Social, and Corporate Governance, has taken root as an umbrella term. The objective of ESG is to make the sustainability and societal impact of an investment measurable.
The ESG concept came to public attention in 2004 via a United Nations report bearing the catchy title Who Cares Wins. Kofi Annan, the UN Secretary- General at that time, invited the CEOs of the world’s 50 largest financial institutions (21 ultimately participated) to create a framework for integrating ESG criteria definitions into capital markets. Their closing report, which was co-financed and co-published by the Swiss Confederation, summarized their findings.
So, does this mean that everything is in place to facilitate sustainability investing? No. The biggest challenge today lies in valuing companies by ESG standards. And that’s not a trivial task, as the Harvard Business Review puts it. The universe of ESG data, it writes, still feels “like the Wild West,” though substantial progress has been made in improving the quality and availability of ESG information.
A Booming Asset Called Data
It is questionable whether this Wild West will soon be tamed. But there’s no question that it will change to a great extent: Data availability, at least, will no longer be a limiting factor. The quantity of ESG data will increase exponentially, just like the ranks of data providers will proliferate. These forecasts were put forth in a white paper titled Data, the Future of Financial Information that SIX recently published (see box). It examines the spectacular growth of the booming asset called data, with a focus on the financial industry. For the world 10 years from now, the authors of the white paper come to the conclusion that “besides the centrality of data, it looks as if nothing will look like the past.”
Imagery of NASA’s Landsat 8 satellite: (1) Eddies of warm water in Lake Baikal have formed a ring in the ice sheet. (2) The Namib Desert’s sea of sand is bounded by the bed of the Kuiseb River. (3) Baffin Island is the world’s largest nesting site for snow geese. (4) The seasonal rains and a cyclone have left rivers swollen and wetlands flooded in Queensland. (5) The Jökulsárlón glacier lagoon in Iceland has quadrupled in size since the 1970s. South (6) The Juruá River is one of the most sinuous rivers in the Amazon basin.
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.
White Paper: Data, the Future of Financial Information
The SIX white paper Data, the Future of Financial Information, from the series Picture of the Future examines the spectacular development of data. The central questions are: On what data basis will investment decisions be made in the future? In what form will data exist and be used? What infrastructure will underlie it? These issues are discussed and analyzed in the context of the rapid development and spread of digital assets, data sovereignty shifting to data subject, increased demands for the protection of privacy, increasing consideration of sustainability and social impact, technological advances in privacy-preserving systems, fake data, powerful AI systems, increasing cybercrime, and a general decentralization of data. SIX presents the future in five scenarios, sorted by probability of occurrence.
In the most likely of five scenarios for the year 2030, people have greater freedom, rights, and ability in their capacity as asset owners, and as investors: The number of investable assets has exploded and ranges from seats at a restaurant to a share of a student’s future income. And data will be assets too. Producers of personal data, for example, can prevent service providers from processing their data and can provide third parties with access to their data instead. Alternative, decentrally collected data like this will also be a deciding factor in investments – for example as ESG data.
“With increasing investor demand for ethical investing and with the progression of data science and innovation, there is no dispute that alternative data, especially ESG data, will continue to gain importance,” says Marion Leslie, Head Financial Information at SIX, stressing that “however, it is important that this data is connected to core reference data. Otherwise it’s meaningless.”
Back to Milton Friedman, the Nobel laureate in economics who opined that companies have only one responsibility: to create value for shareholders. Perhaps in some circumstances the American economist wouldn’t actually have been so fervently critical of ESG as one might think. After all, a number of studies show that companies that adhere to ESG criteria systematically outperform those that don’t. Former Bank of England Governor Mark Carney stated it a bit more radically: “Businesses that fail to adapt to climate change will go bankrupt.”
Data Is the Fuel of Financial Markets
Marion Leslie has headed the Financial Information business unit at SIX since the start of 2020. In this interview, she talks about how the data business has changed during her career, what the future holds, and what opportunities this presents for SIX.
Data is the Future and You Will Be Able to Generate, Control, and Monetize it
Data is considered the world’s most valuable resource. How will data change investment behaviors? Who owns the data? What infrastructure is needed? The SIX white paper on «Data, the Future of Financial Information» provides possible answers to these questions, and many more. Stefanie Gaiser, Senior Program Manager in the business unit Financial Information of SIX, summarizes the most likely scenario.