Regulatory Risks of Alternative Data for ESG Investing
- Andrius Palionis, VP of Enterprise Sales at Oxylabs.io
- 11.07.2022 11:45 am #data #risk
Over half of all investment firms use alternative data to make investment decisions, which has cost $1.71 billion in 2021. In addition to acquiring economic and financial data, investment managers refer to alternative data for company-specific Environmental, Social, and Governance (ESG) information when making sustainable investment choices.
ESG investment is a growing trend worldwide. However, verifying ESG scores is increasingly challenging in the absence of a standard regulatory framework. Obtaining supporting information from alternative data is a solution, however, it carries market, privacy, and ethical risks according to regulatory bodies in many jurisdictions, including the United Kingdom and European Union.
Why Alternative Data is Critical for ESG Investing
ESG scores or ratings are based on the perceived efforts of an organization to adhere to ESG-based values and guidelines. Examples of some activities and policies include renewable energy investments, carbon reduction ratings, management team diversity, employee health and pension benefits, and waste reduction activities.
Since a current regulatory framework does not exist for ESG ratings and data, firms typically purchase data sets and consult rating agencies when assessing an organization’s commitment to ESG goals. In addition to these sources, fund managers look to alternative data for supplementary information to verify ratings and develop a complete picture.
Alternative data is financial information obtained outside traditional sources such as government reports and corporate documents. Methods of obtaining alternative data typically include satellites, mobile phone data, credit card transactions, website traffic, online browsing activity, product reviews, app store analytics, and social media content. Alternative data can also be found online and is typically extracted from public websites via web scraping.
Obtaining Alternative data with Web Scraping
Web scraping is a process that uses programmed scripts or “bots” to gather publicly available data from websites. Some ESG-specific topics of interest to investment firms include:
Sustainable energy investments
Waste removal information
Air quality ratings
Health and safety procedures
Employee compensation
Diversity, equity, and inclusion practices and procedures
Employee health benefits and pensions
Shareholders’ rights
Board composition, structure, and tenure
How Alternative Data Verifies ESG Credentials
Once alternative data is extracted from websites and parsed into a readable format, investors can analyze the information to reveal insights into an organization's ESG-related practices.
AI technology supports analysis by processing extensive amounts of unstructured online data using relationship extraction, automatic summarization, and sentiment analysis to produce clear insights. Results powered by AI help fund managers make better decisions by limiting the cognitive bias and subjectivity that often comes with manual analysis. This provides a neutral, objective, and equitable view of an organization's performance that enhances ratings obtained from third-party rating agencies.
Alternative Data Helps Identify “Greenwashing”
Greenwashing refers to the use of marketing tactics to create the appearance that a company’s actions and policies align with environmental goals. Alternative data provides an unbiased view that enables investors to dig deeper into a company’s outputs, helping investors separate marketing spin from actual activities, policies, and procedures in line with ESG guidelines.
Potential Regulatory Risks of Alternative Data
The UK Financial Conduct Authority (FCA) recently released its Call for Input Paper that captured provisional concerns about alternative data. Issues cited by the paper include equitable data access, analysis techniques, and obtaining an “information advantage” where firms with exclusive data access can identify market movements ahead of their competitors.
Privacy and Ethical Risks of Alternative Data
Some investment firms access alternative data from third-party sources, many of which may be unregulated or use practices that fall outside data protection laws. Some privacy risks associated with unethically sourced data include obtaining sensitive data, images, and user location information.
Regulated entities using alternative data for ESG should develop frameworks to ensure that their data vendors have sourced the data ethically and in compliance with regulatory bodies.
Web Scraping from a Legal Perspective
Navigating the legal landscape of web scraping can be complex. The industry is in a constant state of flux due to a lack of uniform legislation.
Understanding the legal implications of web scraping is critically important, particularly for enterprises that use alternative data for investment purposes. Unfortunately, regulations concerning data collection simply aren’t moving at the same pace as industry demand and innovation.
Oxylabs provides guidelines for scraping non-personal data to avoid regulatory risks associated with obtaining ESG data. Some suggestions include:
Scraping only publicly-available web pages
Ensuring that the data is requested at a fair rate without compromising the web server
Respecting privacy and intellectual property-related restrictions with respect to the source website's data
Evaluating the website’s legal documents and determining if the terms will be breached if accepted
These suggestions, however, are generalized advice. Consulting a legal professional before undertaking any scraping activity is mandatory.
Learn More about Web Scraping from a Legal Perspective
Oxylabs’ webinar, Web Scraping From a Legal Perspective, engaged a panel of lawyers, big data professionals, and company founders to discuss the legalities of web scraping in today’s current environment.
Some topics discussed included:
Different web scraping laws between the U.S., Europe, Asia, and other major markets
Cease and desist letters
Public vs. private data
Incoming regulations and court decisions
Legal effects of account creation
How Terms of Service documents relate to public data
In addition to learning about the current state of web scraping from a legal perspective, the panel also reveals emerging trends and future predictions for the industry.
