Environmental, social, and governance (ESG) scores are quickly becoming one of the main staples of financial firms’ research departments and analyst reports.
On March 8, U.S. brokerage and research firm Cowen announced that it would be the first major Wall Street firm to include ESG scores in its equity research reports. The scores would be equally available to its 55 analysts and firm’s clients.
Cowen will be sourcing data from third-party ESG and artificial intelligence firm Truvalue Labs, which was acquired by FactSet last year. Truvalue Labs uses AI to evaluate companies’ ESG involvement and attainment of goals in an unbiased way, considering both positive and negative ESG actions. Its system strives to eliminate “greenwashing”, a term that is used when companies enhance or exaggerate their green initiatives.
Truvalue Labs captures real-time unstructured data from over 100,000 sources in 14 languages to uncover risks and opportunities for companies. It then uses natural language processing to interpret the information and alert of any stakeholder issues or potential controversies a company may be facing.
Using a set of specific ESG criteria, Truvalue assigns ESG scores to companies on a scale from zero to 100, with 100 being the best score and 50 standing at neutral.
“ESG factors have become a critical component of the investment process and there is a distinct need to have a solution set that can address the volume of information involved and standardization needed to have a clear view of corporate progress,” Robert Fagin, Cowen’s director of research said in a statement.
Truvalue Labs provides coverage of over 19,000 publicly traded companies in developed and emerging markets. The company noted that a study found 84 percent of the S&P 500 market value in 2015 was comprised of intangible assets. Therefore, after mining over one million data points, Truevalue Labs uses AI to present only the information that’s most relevant.
One of the Truvalue Labs’ mottos is “It’s not what companies say, it’s what they do.” The ESG data gathering firm says that it gives you the perspective from the “outside-in” as opposed to the “inside out” that is usually supplied by the companies themselves.
A recent research brief by Truvalue Labs pointed out that one of the greatest challenges to evaluating companies’ ESG contributions and detractions is by over-relying on company reported data. As a result, there can be a significant bias when companies disclose only positive impacts and ignore actions that lead to a negative impact, according to a KPMG study they cited.
“Truvalue Labs SDG (Sustainable Development Goals created by the United Nations) scores address this issue by not relying on direct company-reported information and also accounting for both positive contributions and negative impacts emerging from company actions,” noted the brief.
Examples of the data points gathered include regulatory filings, government sources, non-governmental organizations, industry and academic publications, news reports, trade blogs, and watchdog groups.
“We’re encouraging our analysts to look deeply into the data and incorporate ESG thinking into their overall picture, but there’s no particular formula that we’ve mandated in terms of how they do that,” said Cowen’s Fagin.