Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making

44 Pages Posted: 30 May 2019 Last revised: 10 Jul 2019

See all articles by Soh Young In

Soh Young In

Global Projects Center, Stanford University; Precourt Institute for Energy, Stanford University

Dane Rook

Stanford University

Ashby H. B. Monk

Stanford University - Global Projects Center

Date Written: May 1, 2019

Abstract

What is environmental, social, and governance (ESG) data and how do we evaluate its quality and effectiveness? This form of evaluation is important, as it is a precondition for investors trying to integrate ESG in investment decisions. Previous literature describes intrinsic properties of ESG data (e.g., multifaceted-ness and context dependence) and highlights a trade-off between the validity and reliability of ESG data, which is often tied to the lack of theoretical foundations and scarcity of high-quality ESG data. Encouragingly, new data technologies have improved the accessibility, availability, and transparency of ESG data, but an agreed theoretical framework to evaluate ESG data quality is still lacking. This paper seeks to fill that theoretical gap by proposing a “user-oriented” approach to evaluate ESG data. In this framework, we consider ESG data to be a “continuous concept with limitless boundaries” and characterize it in terms of its width and depth. The bearing of width and depth on ESG data quality is ultimately a function of the investment decisions in which such data is used: the approach we endorse is therefore user-centric. This study then shows how ESG data, when it is of high quality, maps onto the investment decision-making processes. We identify six dimensions of ESG data quality – reliability, granularity, freshness, comprehensiveness, actionability, and scarcity – and explain how these contribute to better decision-making inputs (and better ways of assessing intermediate investment objectives), especially when set within the context of some of the primary variables that investors use in decision making.

Keywords: environmental social and governance (ESG) integration; environmental sustainability; data innovation; alternative data; ESG data; data mobilization and integration; investment decision making; sustainable finance

JEL Classification: Q51; Q55; Q56

Suggested Citation

In, Soh Young and Rook, Dane and Monk, Ashby H. B., Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3380835 or http://dx.doi.org/10.2139/ssrn.3380835

Soh Young In (Contact Author)

Global Projects Center, Stanford University ( email )

473 Via Ortega, Suite 242
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://gpc.stanford.edu/

Precourt Institute for Energy, Stanford University ( email )

473 Via Ortega, Suite 324
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://energy.stanford.edu/

Dane Rook

Stanford University ( email )

Stanford, CA 94305
United States

Ashby H. B. Monk

Stanford University - Global Projects Center ( email )

United States

Register to save articles to
your library

Register

Paper statistics

Downloads
253
Abstract Views
1,135
rank
121,970
PlumX Metrics