Globally, ESG investing is a trillion-dollar industry. Publicly available ESG-based investments (also known as sustainable funds and ETFs) number in the hundreds, with thousands more customized ESG strategies for private and institutional investors.
But secretly, there’s a segment of the investment universe that sees ESG as kind of … touchy feely.
That’s ironic, because scratch the surface, and you’ll have a surprising Aha Moment – ESG is a revolution based on data. At its core, ESG is about giving analysts more and better data regarding:
- how a company operates, and
- how its decisions affect customers, employees and communities.
Traditional financial data like revenues, profits and expenses has the advantage of being easily comparable and of conforming to a single set of standards. But financial data alone can only imply information about company decision making. ESG approaches give you a more direct window into what a company’s policies are, how they are implemented, and what kind of risks are being taken.
That data lets you evaluate not just a company’s past successes, but how sustainable that success is likely to be going forward (which is why we tend to use the word sustainability for ESG strategies). And there’s another advantage – ESG data is what gives you the level of insight that makes it possible to invest in alignment with your values.
The data is getting around
According to InfoMineo, the market for ESG data providers and related consulting is expected to grow to $48 billion by 2028. Many of these providers are large-scale generalists, such as Bloomberg ESG Data, MSCI and Morningstar Sustainalytics, which gather environmental, social and governance data for virtually all of the established publicly traded companies around the world.
But it’s also an environment ripe for innovation, with hundreds of companies developing robust niche datasets. Case in point: FreeCap Financial.
FreeCap is the leading data provider of criminal justice investing criteria, offering insights on 3,000 companies and their interactions with the prison system. FreeCap examines corporate reports and publicly available data to determine:
- Whether a company offers programs to encourage “fair chance” hiring of people who have previously been involved in the justice system
- What risks, if any, a company is taking on by using prison labor in their supply chain and how they manage those risks
- To what degree a company derives revenue and profit from for-profit prisons.
Criminal justice issues and second chance hiring aren’t top-line considerations for every investor, but for FreeCap, that is part of the point.
“There is extensive data today regarding company decisions on environmental and governance issues, but very little about a company’s social impacts,” says Stephanie Shih, head of business development for the firm.
“In our industry, investors are increasingly urging investment providers for more data and more customization. People want this data,” she explains – sometimes to gauge alignment with their personal values and sometimes just to better understand the risks a company is taking.
For example: Union Pacific
FreeCap has developed an index of companies that score well based on its Criminal Justice Scorecard, which it uses to benchmark companies and assess their relative performance. But the data can also be used by larger banks and asset managers to supplement their own internal data or to customize an investment strategy for clients with an interest in, say, criminal justice or racial equity more broadly.
What kinds of companies pass the test? Shih points to Union Pacific UNP as a firm with an exemplary record on criminal justice issues.
“Union Pacific has policies in place that are supportive of second chance hiring, but importantly, they also back those policies with well-developed programs,” says Shih. “They are one of the few companies that have created their own second-chance hiring initiative, to better recruit, train, and retain their second-chance workforce.”
This week, FreeCap is releasing its annual report containing highlights of its data and other case studies of corporate leaders.
The data genie is out of the bottle
It’s an information age, and investors increasingly expect transparency and the ability to anticipate potential risks. In this environment, robust, well-vetted data sets are increasingly essential.
While a company like FreeCap primarily exists to meet the needs of investors focused on criminal or racial justice concerns, any investor can benefit from knowing whether a company has a second-chance workforce and whether they are managing that workforce properly.
That’s true of a lot of the data being developed in the ESG space. The data genie is not going back in the bottle, and the ESG data revolution is only just beginning to take shape.
That’s why the role of ESG data consultancies is so important. Data innovators aren’t just gathering the numbers, they are also looking to improve the methodology and to establish standards in the way companies identify and report non-financial data.
As a part of the sustainable investor community, I know people with a range of values and priorities. But what they all share in common is the belief that the companies we invest in should not be black boxes – we should know what, and who, our dollars are standing behind. ESG data is the path forward, and firms like FreeCap are the reason many people’s Aha Moments are possible.
More of The Aha Moment: Why good information is so important for sustainable investors
