ARX Series 15 April 2021
Big Data for ESG Investing
Big Data for ESG InvestingWatch the Webinar
Artificial intelligence (AI) and Big Data play an increasingly important role in the field of environmental, social, and governance (ESG). Financial institutions are progressively relying on data mining and machine learning techniques to extract and analyse ESG information not only from company reports but also from alternative data sources.
On 15 April 2021, CFA Institute Asia-Pacific Research Exchange (ARX) and the Institute of Financial Technologists of Asia (IFTA) co-organised a webinar on Big Data for ESG Investing. The webinar sheds some light on how WeBank, a Chinese digital-only bank, utilises AI and alternative data sources to generate proprietary real-time data for ESG investing. Dr. Haishan Wu of WeBank made a presentation, followed by a panel discussion that featured other industry veterans, including Alan Lok (CFA Institute), Katherine Han (Harvest Fund Management), and Helene Li (GoImpact), and was moderated by Michelle Li (AMTD Group).
The Rise of Alternative Data Sources
During inception, Dr. Wu outlined how WeBank (hereafter “the firm”), embraced new technologies to generate ESG data in real time for investing. Technology has consistently altered the way news is delivered around the world. Traditionally, newspapers, telegrams, and telephones had been the main channels of communication. Then came the information technology (IT) revolution, which introduced the world wide web through which the world consumed financial data. Now, the world is experiencing a revolution in AI and the Internet of Things (IoT) across all domains, and alternative sources of data have emerged. In this regard, Dr. Wu coined the term “senseable economics,” which means we are now able to gather data from IoT devices, such as mobile phones, satellites, drones, and video cameras, to measure economic activity. To this effect, WeBank introduced a MoonShot platform that uses infrared images from micro-satellites to track economic activity in a given region. Such infrared images can be used to track oil storage and renewable energy around the world. These images also can be used to monitor corporate operations or forecast crop yields in a given region. This innovation was made possible as a result of the significant evolution of micro-satellites, which have become much smaller, lighter, and more affordable.
Tackling Climate Change with AI and Big Data
One of the major challenges with ESG investing has been the lack of independent, timely, and consistent ESG data that can help investors make quality decisions. As a result, the firm created an ESG data platform that uses alternative data, such as satellite images, Global Positioning System (GPS) sensor data, and online text data, and applied an AI algorithm to extract ESG data to generate ESG ratings, factors, and indices. For instance, satellite images can measure the air pollution around the factories as well as the impact on biodiversity resulting from activities of a given business. At the same time, these images can be used to estimate a company’s production of electric vehicles based on activity in their production plants.
The use of alternative sources and Big Data also allows the firm to tackle the major bottleneck of evaluating companies in real time — that is, digital bandwidth constraints. For that, the firm has collaborated with a satellite manufacturing company to embed an AI algorithm onto the chips that can be installed in the satellites, allowing them to monitor the ESG impact of companies on a real-time basis.
The Current ESG Landscape in China
The panel discussion began with speakers highlighting the paradigm shift in ESG. Instead of focusing on alpha, people now want to invest in or buy products of companies whose values align with their own. The COVID-19 pandemic further accelerated the adoption of ESG factors. So, the community has moved beyond the “Why” of ESG, and the emphasis now is on “What” and “How” we can achieve a sustainable future. Investor education is now a major pain point that needs to be addressed. Appropriate metrics should be available to assist investors in understanding two aspects of their ESG investments: (1) how they are helping in risk mitigation and (2) to what extent they are generating alpha.
How Firms Have Adopted ESG Principles in Investing
Katherine Han alluded to the fact that corporate disclosure data have been limited, scattered, and inconsistent. Only about 25% of listed Chinese companies disclose corporate social responsibility reports and the information presented in such reports are of limited use. Hence, it is difficult to standardise the data and calculate the metrics. At the same time, the regulators and the media have demonstrated considerable transparency on ESG issues. With regulators disclosing ESG-related information, such as violations, penalties, and product recalls, on several websites, timely data can be generated by using these sources, and can be analysed by applying natural language processing methods. Hence, it is important for firms to rely on alternative data sources that can help them analyse the companies effectively. However, one needs to maintain a list of weblinks and scrape the data to create a dataset.
Next, Helene Li added that her team leverages the expertise of Nordic countries, which are leaders in ESG, and their proprietary methods to measure impact. Standard setters such as the International Financial Reporting Standards have been pressing for more standardisation in sustainability reporting. This standardisation can complement alternative data sources, such as satellite imagery, to analyse companies effectively. Collaboration among different institutions will play a key role in successfully integrating ESG practices in investment decisions.
Alternative Data: The New Frontier to Generate Alpha
For the ESG investing community, crowding has been a major challenge because most people are using the same data sources. With the introduction of satellite images and social media data, this is the way to stand apart. That said, analysing such data requires complex techniques for which data scientists with required expertise are needed. It is important to understand how data scraping methods are applied so that the decision maker understands how to use the dataset effectively. It is not necessary, however, to shell out a lot of money because a lot of satellite data, such as those from the European Space Agency are free to download. This means a company could collect this data, not just for ESG but also for other decision-making scenarios as well.
In addition, alternative data can push the economy towards achieving carbon neutrality — a goal that China aims to reach by 2060. With data quality issues in measuring carbon emissions of companies, satellite data can be used to help estimate the emissions of different companies and to build their carbon profile.
Risks Associated with Alternative Sources
The biggest risk associated with alternative data is privacy. Alternative datasets also can be used in predatory sales and marketing strategies. This poses the question: how much privacy are we willing to trade in exchange for convenience and efficiency? In the end, an appropriate set of regulations is required that balances the issues of privacy with the level of comfort that consumers want.
With the availability of so many new alternative data sources, it is important for professionals to at least understand the basic data analytical tools. Additionally, in the next few years, it is highly likely that the current set of alternative data sources will become even more structured and organised. Therefore, professionals should be open to these new tools, which can help them better analyse the data.
About the Author(s)
Ms. Li is a promoter and influencer in FinTech industry. She speaks frequently on major industry events such as Asian Financial Forum, Hong Kong FinTech Week, Singapore FinTech Festival etc.. She leads AMTD Group’s FinTech initiatives with a vision to offer one-stop, cross-market and intelligent digital finance solutions for Asian consumers and SMEs - to make digital financial services proactive and seamless. AMTD owns Airstar Bank, a JV with Xiaomi, one of the eight virtual banks in Hong Kong. AMTD also announced a few landmark acquisitions in ASEAN including PolicyPal (InsurTech), CapBridge (Digital Asset Exchange) and FOMO Pay (Payments). Together with MAS and SFA, AMTD has launched MAS-SFA-AMTD Solidarity Grant to support FinTechs in the challenging time; AMTD has also established an AMTD ASEAN Solidarity Fund together with AFIN to support and anchor FinTechs in ASEAN. Ms. Li also leads the research department of AMTD Group. She specializes in analyzing the global FinTech industry and financial sector. She publishes frequent reports on FinTech topics such as AMTD Global FinTech Weekly, China Online Consumer Lending, and Blockchain 101. Before joining AMTD Group in September 2016, Ms. Li worked at UBS AG as a securities research analyst.
Dr. Haishan Wu is leading the AI Department at WeBank. His team is building AI and alternative data driven investment platform in WeBank. His team compiled China Economic Recovery Index (CERI) to track the economic impact of COVID-19 in China.
He was the Director and AI scientist at BlackRock. He was the founder and CEO of SenSight.ai before joining BlackRock. And before that he was the lead data scientist of Big Data Lab in Baidu AI Department.
His researches were not only published in prestigious journals and conferences, but also widely featured by major international media outlets. His research on data driven ghost city mapping in China was selected as Best of 2015 by MIT Technology Review.
He earned his PhD degree from computer science department of Fudan University in 2011. He was the postdoc researcher in Princeton University from 2013 to 2014.
He was recognized as 35 Innovators Under 35 in China by MIT Technology Review in 2017. He was also recognized as one of Top 50 data scientists in China in 2018.
Katherine Han is the head of ESG research at Harvest and spearheads the group’s ESG integration program under the CIO. She and her team is responsible for establishing Harvest’s proprietary ESG framework and database for China market, conducting ESG factor and strategy analysis, issuing ESG investment recommendations and reports, as well as managing Harvest’s stewardship program and engagement initiatives with investee companies. She works closely with Harvest’s investment teams and clients to build responsible investment capacity and incorporate material ESG factors in investment across different asset classes. Katherine recently led the award-wining project to publicly launch Harvest ESG scores in cooperation with the local financial data platform WIND.
Prior to Harvest, Katherine was a senior analyst with MSCI ESG Research for eight years, where she led the global technology sector research and was a member of APAC ESG methodology committee. She led the China ESG team for initiating and expanding the ESG coverage of China market. Her prior roles include governance analyst with ISS and multi-asset class analyst at MSCI Barra.
Katherine Han is a CFA charter holder and certified FRM holder. She holds a Master’s degree in Finance from Renmin University of China and a Bachelor’s degree in Financial Engineering from Beihang University.
A firm believer in applying market-based solutions to fast track social and environmental impact; and a passionate advocate for Sustainable Finance, Helene is a management consultant by training and a seasoned finance industry professional with long tenures in strategic planning and marketing roles at global financial institutions such as J.P. Morgan, Lombard Odier, and BNP Paribas. Having worked in the ultra-high-net-worth space for most of her career, she is committed to leveraging the financial power and heart of the 1% to accelerate the impact in helping the 99%. It is in this spirit that she co-founded GoImpact as an action-driven ecosystem to connect stakeholders in accelerating the Impact momentum. She has been spearheading and curating industry recognized and highly rated Next Generation Family Business programs, and a regular contributor to Impact and Entrepreneurship research throughout her banking and consulting career.
Alan Lok is responsible for engaging the growing CFA Institute member societies in Asia Pacific in advocacy work. In his role, Mr Lok works with member societies to advance awareness and adoption of CFA Institute ethics and standards, as well policy positions on financial market integrity issues. This involves outreach to local stakeholders, including the industry, financial regulator, and the public across the APAC markets. Alan also managed thought leadership research projects carried out by societies leaders as well as facilitating their advocacy activities on the Asia-Pacific Research Exchange (ARX) post publication.