Nasdaq Looks to Contextualize ESG Ratings

Without context, an environmental, social, and governance (ESG) factor is just a number on a screen. In May, to help contextualize these incredibly varied datasets, Nasdaq released a new tool—dubbed ESG Footprint—that allows investors to track the ESG impact of a company or portfolio of companies, cataloging sustainability criteria like carbon footprint, board diversity, and companies flagged for human rights issues.

For ESG Footprint, Nasdaq teamed up with Danish vendor Matter, helping the exchange operator to translate the ESG impact of stocks and portfolios into more digestible data. “Clients are asking more and more detailed questions around sustainability. A single ESG reading doesn’t cut it anymore,” says Niels Fibæk-Jensen, co-founder and CEO of Matter.

For example, if Saudi Aramco has produced 59.26 tons of carbon dioxide since 1965, it’s a number that can be ranked, but it might not immediately make sense to a portfolio manager. If Procter & Gamble doesn’t have a black person on its board of directors, how does that compare to other similar firms? Texas Instruments reduced wastewater discharges from 175 million gallons per year to less than 50 million—is that a success or do they still lag woefully behind similar companies?

The aim of ESG Footprint is to make these numbers more digestible, such as breaking electricity usage down to the number of London townhouses that much electricity could power per year. Telling a portfolio manager the combined water usage of all the companies in their portfolio might not register with them—or might not inspire action—if they cannot see the context of that water usage, says James McKeone, head of European data at Nasdaq.

“For most people, that number is kind of irrelevant,” McKeone says. “So, we work with Matter to translate those numbers into something that customers can understand.”

Through ESG Footprint, ESG impact is measured across categories, such as gender board balance or CO2 output. When a trader logs into the platform, they see the stocks they are holding, the performance of those stocks, and then ESG data displayed against a contextual example. “It will say, ‘This is your water usage, which is the same as six households in the UK, or that the combined CO2 output of your holdings is the same as running 25 cars every month,’” McKeone says.

“We worked with Nasdaq on trying to take this core idea of being able to report sustainability and impact of investments in a more intuitive and meaningful manner,” adds Fibæk-Jensen, as sustainability and corporate responsibility issues will look entirely different from person to person, or company to company.

ESG Footprint uses natural language processing (NLP) to analyze news relating to companies listed on Nasdaq’s exchange, tagging them “for beneficial or controversial topics from an ESG perspective,” McKeone says. The tool bases its analysis on the United Nations’ 17 sustainable development goals (SDGs), which include gender equality, affordable and clean energy, and an end to poverty and hunger.

For Matter’s part, it gathers data from a range of sources, including what companies self-report, the Nasdaq ESG Data Portal, Non-Governmental Organizations (NGOs), trusted media outlets, and academia. That data is aggregated and analyzed using NLP to understand whether companies are being praised or criticized based on sustainability characteristics or key words. Fibæk-Jensen says his approach is to counter what the companies themselves are saying, with what the outside world is saying.

“The tool is based on the logic that we need to get 360-degree data from the companies,” he says, “We need to look toward the critical voices in the room.”

He adds that the company actively seeks out content producers that have specific expertise around different frameworks within the ESG world, such as human rights, or tax, or carbon emissions specialists. For example, Matter will look at an NGO publishing data on companies working with and using palm oil, which raises ESG risks around local air pollution, as well as human and labor rights violations. It then both scores a company based on its palm oil production/usage, and then contextualizes the metric, providing insight into how many trees are cut down to produce palm oil.  

ESG Footprint also allows for customization. For example, a Nasdaq customer wanted to see CO2 output in terms of the number of flights from London to Bangkok, which required finding out how many flights per month a single person would have to take from London to Bangkok to match the CO2 output currently being held in that particular portfolio.

Fibæk-Jensen says the next goal for ESG Footprint is to break down sustainability sentiment to each of the UN’s 17 SDGs. Then an investor or trader will be able to see which companies are being praised or criticized according to each of the 17 goals, providing greater transparency to the idea of sustainability and giving investors a clearer view of exactly where companies fall down when it comes to each of the three pillars.