Just because a company says its business practices are ethical, doesn’t necessarily mean they actually are. Recent studies suggest that companies are able to influence their ESG score by greenwashing corporate sustainability information. In this report, we argue that alternative data can be used to test ethical claims as well as build a more accurate and objective ESG risk signal.

The evolution of traditional ESG models

    “It isn’t what we think or say that defines us, but what we do,” – Jane Austen, Sense and Sensibility.

Ten years ago, ESG scores were mostly built from ‘yes/no’ responses on whether companies had sustainability systems and policies in place. Such binary models left little room for granular detail, in-depth analysis and accurate peer comparisons. In our current information age, ratings providers now have more data points than ever to assess the ESG performance of public companies. Increased focus on ESG issues has put more pressure on companies to disclose their sustainability efforts more frequently. As the chart below shows, the number of companies in the S&P 500 reporting on sustainability metrics has increased from 20% in 2011 to 82% in 2016.