The demand for data-screening services that assist investors in finding investments aligning with environmental, social, and governance (ESG) standards has seen a significant surge. As of June 2023, over 20% of global fund assets were invested using restriction screens. This is a substantial increase from three years ago, marking a tenfold growth, according to data from Morgan Stanley. The trend is largely driven by evolving investor values and regulatory changes such as the EU’s Sustainable Finance Disclosure Regulation.
Investors now have the ability to avoid specific sectors or companies and can prioritize investments that promote beneficial outcomes like cleaner energy or gender equality. Currently, around 8% of global fund assets are sustainably invested.
Data providers such as Morningstar Sustainalytics are utilizing AI technologies to screen investments against ESG criteria. They monitor a wide range of publicly available sources and maintain quality control through analyst reviews. Another player in this field, MerQube, leverages "prompt engineering" in generative AI models, viewing complex information as opportunities for investors. The company uses natural language processing to analyze the language used in earnings calls for forward-looking insights.
However, the process of ESG data screening is not without its challenges. Issues such as variable data quality and rapidly evolving regulations pose difficulties. To tackle these obstacles, Morningstar Sustainalytics has implemented technology-supported safeguards to ensure data reliability and trustworthiness. They have also developed methods for comparing a company’s climate targets over time.
Another significant contribution towards ensuring the integrity of ESG data comes from Sourcemap, which verifies company claims about material usage. This has played a crucial role in fraud prevention within supply chain data.
In conclusion, the growing demand for ESG-aligned investments is driving the need for reliable data-screening services. As the sector evolves, these services are leveraging advanced technologies and implementing safeguards to ensure the quality and trustworthiness of ESG data.
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