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

In, S.Y., D. Rook and A. Monk (2019) “Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making,” Global Economic Review, 48(3), 237-260.

44 Pages Posted: 30 May 2019 Last revised: 10 Nov 2020

See all articles by Soh Young In

Soh Young In

Korea Advanced Institute of Science & Technology (KAIST); Stanford University - School of Engineering

Dane Rook

Stanford University

Ashby Monk

Stanford University

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, Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making (May 1, 2019). In, S.Y., D. Rook and A. Monk (2019) “Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making,” Global Economic Review, 48(3), 237-260., Available at SSRN: https://ssrn.com/abstract=3380835 or http://dx.doi.org/10.2139/ssrn.3380835

Soh Young In (Contact Author)

Korea Advanced Institute of Science & Technology (KAIST) ( email )

291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Stanford University - School of Engineering ( email )

Stanford, CA 94305-9025
United States

Dane Rook

Stanford University ( email )

Stanford, CA 94305
United States

Ashby Monk

Stanford University ( email )

United States

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