Alternative data underused but has potential for ESG

Institutional investors in Asia are not yet major users of alternative data, but some are beginning to particularly recognise its value when measuring environmental, social and governance (ESG) and sentiment, according to panellists at a webinar hosted by AsianInvestor. 

"The utility of alternative data sets has been fairly limited [to date] with only the very advanced clients adopting its use,” Puneet Singh, the Asia Pacific head of equity quant research at Societe Generale Corporate and Investment Banking, said at the 'Making the most of alternative data' webinar, which was held on Wednesday (November 18) in partnership with data solutions provider FactSet. 

Alternative data refers to non-traditional information about companies, societies or economies beyond the usual information provided by banks, which data vendors, investors and traders can potentially use to hone investment choices.

For example, in addition to looking at credit reports or ratings provided by banks, financial services may opt for data that includes transaction records, online sentiment, consumer receipts or public data. The term also encapsulates how the information is delivered and processed.

Michael Rhodes, vice-president of content and technology solutions at FactSet, observed that 70% of global investment companies are still in the early or exploratory stages of alternative data use, and will need to better understand how it can be used before rolling it out  

“Until we get further along the curve, more explanations on how we arrived at the outputs that we have [would be needed],” he noted.

The panellists agreed that the regional investors and fund managers that have invested in alternative data typically use it for ESG and sentiment analysis.  

“You don’t escape the news one day without the mention of ESG. Most noticeable last year in Asia was that it has been heavily institutionally invested in,” Rhodes said. “ESG is not going away... Research has clearly demonstrated that a firm that scores highly in ESG delivers long-term value to investors.” 

“Yes, we are looking out for future generations, but there are [also investment] returns to be had there,” he added. 

One way investors can gain value via alternative data is by using natural language processing in the news flow to provide ESG insights, Singh said. The technologies can, for example, analyse news articles to derive sentiment surrounding a company’s ESG efforts.  

AsianInvestor reported last week that some investors do refer to third-party ESG data and that there has been a rise in the use of AI among fund managers to capture such data. However, a lack of data standardisation is limiting the potential of ESG, with the dozens of data providers lacking a consensus on how best to measure and analyse this data.  

Marko Milek, head of global exchange for Asia Pacific at State Street, who also spoke on the webinar, added that alternative data could prove useful to analyse behavioural flows.  

“There is a lot of interest in economic attributes that can be calculated from non-traditional sources that can impact foreign exchange moves,” he said.  

WHERE TO START?  

Investors should not view alternative data as a replacement for traditional data but as an augmentation of current research and investment processes, the three speakers said. 

To effectively adopt alternative data into their investing decisions, asset owners first need to address a trifecta of problems, according to Milek. 

First, they need to identify the business process, operations and outcomes they are trying to achieve. Secondly, they need to know the scope and underlying datasets they require, whether it is enterprise data management, or data management for a particular business vertical. 

“Lastly, in terms of technology and infrastructure, there is a plethora of solutions available, from 100% do-it-yourself to outsourcing everything,” Milek said. 

He advises investors to talk to peers, vendors and consultants. “Try to understand what is the purpose of your particular company. Why are you around? What is the value you bring? What are your capabilities? That should guide what to do yourself and where to get help,” he said. 

It is also important to invest in a data management solution that is forward-looking and scalable, Singh and Milek agreed. 

“There has been discussion around cloud-based solutions – which accelerated as a result of the pandemic. Firms that withstood the challenges of work-from-home are those who adopted cloud-based approaches, which provided remote access to end-users at speed,” Milek said. 

“Anyone thinking about investment that is not cloud-first or cloud-ready, should really think about how long will the alternative be successful,” he added. “There is definitely a momentum towards building an ecosystem of data applications that as seamlessly as possible talk to each other." 

Asset owners have also been found to be lagging when it comes to using artificial intelligence for investing.  

“In the industry, there is some dose of scepticism because I have heard the question through data vendors asking, ‘If this is such a strong signal of alphas why don’t you build a fund out of it and why are you selling me the data set?’” Milek said. 

But he remains confident in alternative data. “Time will tell,” he said. Although, “if anyone has found something, it’s heavily proprietary and we wouldn’t be talking about it.” 

This article has been updated to clarify the meaning of a quote made by Michael Rhodes of Factset in the webinar.