The ESG Update Episode 14: Creating Better, Affordable ESG Data

Good ESG data doesn’t have to break the bank. Qayyum Rajan joins the show this week to share how his firm, ESG Analytics, is harnessing the power of artificial intelligence to democratize ESG data for all.

Transcript

This transcript has been edited for clarity

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I'm your host, Dan Carreno. I am the head of business development at Change Finance, and we are an ETF provider dedicated to environmental, social, and governance investing. Our mission is to help investors align their portfolios with their values without sacrificing returns. And I am joined this week by Qayyum Rajan, who is the CEO of ESG Analytics. He goes by Q. This week, we're going to be digging into the wild world of ESG data and ESG ratings. It's the wild west out there right now. Q, what's going on? How are you today and ready to dig into this?

Qayyum Rajan, ESG Analytics:
Hey Dan. Thanks for having me on and looking forward to getting into this. It's the wild west, as you say, and I think people need to be a little bit more aware of what’s going on.

Dan Carreno, Change Finance:
Before we start digging into the analytics and the ratings, I want to get your feedback on a couple of articles and things that are going on in the ESG community. So, let's start there, and I did want to get your perspective on an article here from IR Magazine, which is talking about some polling conducted by Bank of America at a recent ESG conference. They polled a bunch of institutional investors that attended the conference to see what the top priorities were in terms of concerns around issues related to investment portfolios as we go into the new year, 2021. It turns out that climate change is still at the top of the list. That was followed by corporate governance, supply chains, and access to renewable energy. Less than 25% of respondents listed social issues as being a top priority in the new year. I thought this was interesting because it seems to fly in the face of the school of thought coming out of last year, that social issues had really been elevated in the consciousness of ESG investors. So, you're on the data analytics side of things. What are your experiences with your clientele about how people are prioritizing and weighting different issues related to environmental, social, and governance?

Qayyum Rajan, ESG Analytics:
It's quite interesting to see that perspective on the poll, especially because of the Black Lives Matter movement and everything that happened last year. Social has become so much more important. I think from an investor perspective, it's interesting that climate is still at the top. I think the reason for that is because it's one of the most measured things, and it's matured as far as all the frameworks and the policies go. You have the TCFD disclosures and CDP. Everyone measures carbon emissions. Social issues are coming more to the forefront, but we're still way behind in terms of actually measuring the impact. I would hope that that social number goes up a little bit more. We take all of those into account. We look at environmental, social, and governance and all the subtopics in each one. We give people the ability to select what matters to them and then weigh according to their perspectives because every investor is different. While a lot of people care about climate, some don't, and some only care about social rights. Some care about the whole piece. It's all dependent on the individual person or firm.

Dan Carreno, Change Finance:
More and more, we're thinking about ESG as being a risk mitigation tool. Do you think this is because some of these large institutional investors might look at the social issues and say, yes, they're very important, but climate change is just such an enormous issue that has such an enormous financial impact on physical assets, transition, risk, etc? Do you think that's why it's still at the top of the list?

Qayyum Rajan, ESG Analytics:
I think that might be one reason. I think it's also the one that's had the most traction. From a fund flow perspective, as people go into more sustainable funds, they can address this because it's being measured more with a tight degree on scope one, scope two, and scope three emissions. That was unheard of a few years ago, but now you're measuring carbon emissions for your employees and your supply chain. Whether you're a bank or a mining company, that increased scrutiny, it's leading people to be more and more diligent about all the metrics and the systems that are coming in to make that happen.

Dan Carreno, Change Finance:
Thanks for your feedback there. Let's move on to another article here to start digging ESG analytics and ratings. We have an article titled, “How to Navigate the World of Sustainable Investing Ratings.” It’s from CNBC. They're highlighting some of the frustrations that many of us that work in the ESG industry have heard numerous times, in that there is this disparity and dispersion amongst rating agencies. There are differences in terms of what they are measuring, how much they're weighting a particular metric, and materiality, which is how some ESG factors apply to companies in different sectors and sub-sectors of the economy differently. Ultimately this creates some issues. Number one, it's dampening the positive impact that responsible investing could have because if there's not an objective truth about what being a sustainable and responsible company really is, the companies aren't quite sure what to do. And in the face of that uncertainty, they may end up not doing much at all. It also gives some fodder to those that are ESG skeptics. They're saying how can we say that ESG investing is valuable in terms of risk mitigation or potential performance benefits if we can't even agree on what companies are rating at the top of the pack and at the bottom of the pack in terms of ESG. I’m curious to hear your perspective.

Qayyum Rajan, ESG Analytics:
It's referring back to the wild west that you called it earlier. I think we're going into a renaissance in ESG data right now. It started off with a lot of consultant firms creating reports, and there are not that many companies that are actually covered. A lot of them are reliant on company disclosure, and everyone discloses differently. Everyone has a different methodology. It makes sense why there are so many different reports and articles like this one from CNBC. There was also a big correlation matrix that showed all of the differences. But we're getting to a stage where we might actually have machine-readable ESG disclosure, very similar to how we have financial disclosures today. I think as we move from the wild west to more disclosure frameworks, everyone will look at the same thing correctly. And you mentioned materiality. This is something that was more ad hoc before, but with things like the SASB materiality matrix, and other kinds of frameworks, it should lead to more consistency over time.

Dan Carreno, Change Finance:
You're somebody that decided to move out to the frontier, so to speak, to move to the wild west and enter this industry of ESG analytics. I’m curious about your perception of landscape in terms of what other companies were doing. What did you notice about that landscape that encouraged you to step in and provide a different solution? And what is the different solution? What are you doing at ESG Analytics that you feel is solving any shortcomings?

Qayyum Rajan, ESG Analytics:
The reason that we started the company was that in looking at all the sustainable ETFs in the world, when you look at the holdings, they didn't seem that different from the common indexes. It was really the same thing, again and again. The more we dug in, the more we realized that there are not that many companies that are actually covered from an ESG rating perspective. There are only about 10,000 to 15,000 companies in the world that actually have a rating. And it's based on company disclosed data, which is very expensive to do. Think about a small cap fund. What do they do for ESG ratings? Then the kick in the can was I saw this chart, which was the lowest-rated ESG stocks, and it was many components of the S&P 500. I wondered if those really were the lowest-rated ESG stocks in the world. So what we decided to do is take a look at data outside of company disclosure, alternative data. We look at unstructured data, such as news, press releases, earnings statements, company reports, and regulatory reports to see if we can take an automated approach to ESG screening and integration. That's what we built with the analytics. The solution is a compliment to analyst reports, which have a time lag and are only covering so many companies. This allows you to see things in real-time. This becomes a solution where you can start to look at the analysis on a real-time basis and get some insights, which you didn't have before. We cover about 60,000 companies today, and we are going into private markets and charitable organizations to really try to open this world up to pretty much everyone who can keep track of issues, keep track of material factors without breaking the bank.

Dan Carreno, Change Finance:
I'm going to ask you to please dumb this down for me. I'm not a tech guy. When you say an automated solution, what does that mean? What's actually happening? What kind of technology are you using in order to gather all of this data?

Qayyum Rajan, ESG Analytics:
What we have effectively done is we've created a top-level taxonomy of ESG in the world today. We've taken all the different frameworks, SASB, the UN SDGs, and we look at each individual topic, E, S, and G, and look at all the subtopics. We've trained algorithms to go out into the world every day in real-time, and look at all of the data that exists for each of these companies. This can really scale it up in terms of looking at 70,000 companies in real time. And we're able to categorize materiality. We're able to look at all the different flags and topics that drive sentiment.

Dan Carreno, Change Finance:
How does that translate into actual coverage? You were saying one of the issues before was that good information on companies from an ESG perspective was too narrow. Does this type of approach allow you to broaden that out and start examining more companies?

Qayyum Rajan, ESG Analytics:
Right off the bat, we've gone from 15,000 companies to 60,000 companies at the launch of our platform, and we're just getting started. There's so much data that exists for all of them. Think of any company in the S&P 500. It's probably covered. Think about a company as big as one of the big unicorn startups. They're likely not covered. But that's still is a concern for private equity investors. With an approach like ours, we can go in and get all that data and categorize it. We can really scale up how many companies are covered over time.

Dan Carreno, Change Finance:
You said you’re at 60,000 currently. What percentage of those might fall into a small and mid cap arena?

Qayyum Rajan, ESG Analytics:
I would say most of them. We cover companies across 64 different exchanges. They end up being probably 60% to 70% small cap.

Dan Carreno, Change Finance:
Excellent. For those folks out there that may have had frustrations in the past about not being able to find the kind of data that they would like to see for small and mid-cap companies, this is a potential solution. Let's talk about financial products. Many financial advisors and investors are not necessarily looking at the individual securities but want to see things aggregated up to a fund or ETF level. So how can your product help in analyzing those types of funds?

Qayyum Rajan, ESG Analytics:
We do this for ETFs and mutual funds. All of the underlying company data that we have, the flags generated by the AI, we aggregate it all to the ETF or fund. If you pull it up on the platform, you can see how many flags exist for a given topic for an ETF or fund. You can then go into each individual constituent holding and do additional analysis as well.

Dan Carreno, Change Finance:
Excellent. Is there anything else that you wanted to mention about what you're building there in terms of things that are in the pipeline for future development?

Qayyum Rajan, ESG Analytics:
We've just introduced some cool features. We call them collections and feeds where you can have a collection of portfolios and start to get day-to-day real-time updates on ESG material issues that impact your portfolio. Then you can flip that around for a given ESG topic, such as human rights or forced labor. You can see which companies are flagged on that each day. You can get alerts on this, which allows you to have a real-time feed for the things that you care about. You can do this for individual companies, funds, or the topics.

Dan Carreno, Change Finance:
Last question then, if I am a financial professional ranging from a financial advisor to an analyst to a portfolio manager at an asset management company, how do I go about accessing this information? And what does that look like in terms of cost?

Qayyum Rajan, ESG Analytics:
Just like the transparency for our data, we want to be transparent about prices as well. We offer this as a simple subscription service. You can go to https://esganalytics.io/, and it's $130 a month. Plain and simple. No need for crazy contracts and no need for a huge sales conversation. For most financial professionals, we recommend our web-based platform. We also have an API or data feed available. That's for institutions who want to integrate it into applications.

Dan Carreno, Change Finance:
Well, Q, I really appreciate all this. Thank you for the work that you're doing. I know it can't be easy to try to reign in this ESG data and make it simpler and more objective. So I appreciate your work. I want to mention that anyone listening who wants to find any of the articles or resources that were discussed during the podcast, you can always find those on our website, which is www.change-finance.com. It's going to be under the podcast library, which is under the INSIGHTS tab. And of course, if you have any questions or feedback for us, you can always get in touch with us through the website. Thank you very much for listening. Q, thank you very much for being on today. And we will be back soon with another episode of the ESG update.