Transforming Sustainable Insights into Investment Opportunities

As Systematic investors, data and research drives every investment decision we make. The ability to measure value-relevant sustainability in unique and novel ways plays a vital role in our investment process. Insights like employee sentiment or welfare, for example, help us distinguish out-performers in ways not captured by traditional financial metrics. Using a combination of big data and sophisticated analytics techniques, our Systematic Equities team seeks to identify investment opportunities in companies with sustainable characteristics that we believe are positioned to be winners as market conditions evolve.

The ESG “Prism”

Sustainable investing in Systematic Equities is more precise than tilting to off-the-shelf environmental, societal, and governance (“ESG”) scores. Analyzing the investment universe from the lens of a data driven “ESG prism” provides an alternative view on which companies are better (or worse) positioned for future outperformance, and hence, alpha opportunities for investors.

The ESG prism summarizes the range of data sources available for uncovering opportunities within the investible universe. It highlights four key components: risk mitigation, human capital, society, and transition. Alternative data are key to measuring all four.

Risk Mitigation insights seek to identify – and avoid – corporate pitfalls. Related data includes, but is not limited to, controversy information, news flow, cyber defense data, and tax transparency.

Human Capital insights reflect the impact employee welfare has on retention and productivity. Data in this dimension includes but is not limited to, employee sentiment, diversity statistics, and employee benefits.

Society insights focus on improved social and financial outcomes. Relevant data includes measures of community financial and physical health.

Transition insights identify how companies are preparing for the economic impact of the energy transition. Related data includes but is not limited to, carbon and water efficiency, FEMA research, and environmental innovation information.

Human Capital: Data Driving Corporate Excellence

For many of today’s largest companies, human capital is their strongest asset. Our Systematic team leverages human capital insights to measure attributes and outcomes that drive firm performance. In our experience, companies that invest in the relationships that are critical to their ability to meet their strategic objectives are more likely to deliver durable and consistent financial results.¹

We test and validate each insight through a rigorous research process to gain a deeper understanding of which companies’ workforces have the skills and less tangible attributes necessary for delivering long-term financial performance.

We can assess a company’s ability to attract, retain and develop a highly skilled workforce using a variety of metrics, for example, we examine the hiring of employees under the H-1B work visa program. This visa category allows U.S. employers to petition for foreign professionals to work in “specialty occupations” that require a bachelor’s degree or equivalent. Obtaining this visa typically requires employees to have specialized knowledge in areas like engineering, biology, physical or social sciences, and mathematics. The hiring of H-1B visa holders can indicate where a company stands competitively in attracting talent in expert fields. The inability to attract highly skilled talent may indicate a loss in competitiveness across all industries, ranging from resources and retail to manufacturing and technology.

Measuring employee well-being and morale is also a key aspect in identifying investment opportunity, in our view, as it can predict a company’s ability to retain valuable employees. Our analysis shows that happier employees are more productive, and employees tend to be more content at businesses that are outperforming.

One of our early signals was top-level ratings from Glassdoor’s website; this measure is simple, but we have used this information for almost a decade, well before it was reflected in any published research or ESG rating. Our subsequent models analyze employee commentary from Glassdoor to gauge how happy employees are with the benefits provided by their employer; we have long been measuring benefit programs from the company perspective, but text analysis from Glassdoor helps us capture how satisfied employees are with such programs. In figure two below, an increase in benefits sentiment results in about a 10% reduction in employee turnover. We see stronger financial and employee retention performance in companies that offer stronger employee benefits programs.

The ROI on Workplace Safety

Worker safety is another critical component of well-being within the workplace. One metric that reveals details on the state of worker safety is Occupational Safety and Health Administration (OSHA) inspections data. OSHA is the government agency responsible for enforcing occupational safety and health regulations in workplaces across the U.S. While it may not be readily apparent, our research reveals that these inspections have a positive effect on future company fundamentals and stock price performance.

While more than half of OSHA inspections are planned, the second-most common trigger is complaints by one or more employees within the company. About 20% of OSHA inspections are triggered by employee complaints, as seen in figure three below. Employees who report a complaint to OSHA do not gain any direct financial reward, but instead seek improved workplace conditions. A higher number of inspections is not necessarily associated with lower employee sentiment. In fact, maintaining a viable and attractive underlying business model can serve as a strong incentive for employees to seek these improvements.

Our research has found that higher inspections are indicative of higher sales the next year, as companies tend to outperform post-inspection and even post-issuance of a violation. Thus, we believe OSHA inspections have both indirect and direct effects that support near-term improvements and positive performance within covered companies. 

Profit + Purpose: Sustainable Data’s Alpha Advantage

Sustainability insights can improve our investment decisions by predicting company fundamentals without relying on traditional data sources. Examining recruiting and retention practices, company sentiment and workplace conditions all provide compelling use cases of ways investors can identify long-term profitable investments with alternative sustainability data. Our data-driven processes allow us to uncover alpha opportunities in differentiated ways and our team is continuously innovating to understand which companies are likely to benefit most.