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The investor sentiment shift towards a conscientious society, a greener planet and improved governance practices is driving all financial institutions, whether big or small, traditional or fintech, to be fully in control of the ESG standings of their investment and underwriting positions, and embed ESG considerations into their reporting and risk management frameworks.

At the start of 2021, we saw a high-profile event where many professional hedge fund managers lost out due to retail investors purposefully making investments to push up stock prices; this activity was coordinated via social media. If firms were using more sophisticated ESG big data mining techniques to take account of sentiment analysis from social media feeds as part of risk monitoring exercises, for example, they would likely have detected that millions of retail customers were taking long positions in companies they were shorting.

Real-time reputational risk monitoring around ESG issues is now commonplace for most tier-one financial institutions. Sentiment monitoring of popular major social media platforms, such as Reddit and Twitter, that use well-chosen search terms can quickly pick up on reputational risk or issues surfacing online about a company.

The same goes for more exhaustive web searches for company references and regulatory filings; such exercises can spot when a company is gaining traction for the right or wrong reasons. Likewise, ESG analysts can use advanced data mining techniques to trawl through controversies or customer complaints and analyse them periodically to find common themes.

But, identifying the right ESG data source, deciphering it and collating it is not straightforward. Whereas financial reporting is standardised and in familiar formats, corporate reporting around ESG dimensions is anything but. Companies are not yet obliged to report most ESG-related information in a standardised manner; therefore, practice is fragmented and disparate. There are few standard templates, meaning that companies will publish different information in different ways.

Much ESG information is also self-reported through periodic sustainability reports and annual reports. Inevitably, this opens the possibility of greenwashing. Understandably enough, corporates are keen to paint themselves in the best light possible.

For that reason, a simple plug and play off-the-shelf ESG score is not good enough any longer. We have seen some firms inadvertently over-invest in carbon due to relying too heavily on these off-the-shelf ESG scores or indeed announcing a sustainability strategy that is incompatible with their current (on or off) balance sheet holdings.

Cutting through the noise, obtaining relevant information quickly, and analysing it effectively, is no small task. We have also seen the opening of something of a two-speed market. Big global institutions have been highly active in either building their own in-house data analytical capabilities for ESG or acquiring one of the new breed of fintech data aggregators or a combination of both. M&A in this space has been prolific.

This means that the big institutions can track data signals across multiple sources and decipher them almost instantly. To adjust their responses, they can react to breaking news or controversies, machine-read legal documents, or even analyse investor sentiments from social media. In recent years, even large credit rating agencies and market data providers went on a buying spree to remain competitive and cater to the ESG and sustainability-related demand. However, it is often far more challenging for smaller players with constrained budgets having to stretch across many competing priorities.

For any manager left in any doubt of the need to prioritise this if nothing else, recent market events should be your wake-up call to cast the data net much, much wider.

If even a sliver of a silver lining can be found in the pandemic, ESG moving well and truly into the mainstream of financial services has to be a good contender. ESG is now well on its way to redefining capital markets as we know it into a more transparent and conscientious one.

Budha Bhattacharya is head of analytics for ESG IQ, developed byKPMGLighthouse. He is also an industrial professor of finance and banking at UCL, Institute of Finance and Technology.

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How Financial Institutions Are Trying To Make Sense Of ESG Data - Todayuknews - Todayuknews