Satellite Images Drive Climate Conversations

Satellite imagery is one of the many potentially profitable alternative datasets that hedge funds and investment management firms are starting to use in earnest. But firms should be thinking carefully about how they are going to use that data.

“The conviction behind how the data should be used and interpreted—that is what is generating alpha, rather than the data itself,” said Christine Chow, a director at Hermes Investment Management, who was speaking at this year’s Waters Europe conference.

She said that Hermes uses satellite imagery to track the firms they invest in to assess their ecological footprints.

“We pride ourselves on being responsible investors. One of the … elements we are dealing with is looking at how well companies are managing the physical impact [of their activities] on climate change. And one of the methods we use is satellite imagery to map out the core assets of different companies to see if they might be subject to sea-level rise or hurricanes,” Chow said.

• READ MORE: While ESG data is gaining prominence, institutional investors are increasingly looking to incorporate climate change information into the portfolio construction process. Click here to read more.

Nico Smuts, investment data scientist at Investec Asset Management, was speaking on the same panel as Chow at the conference. Smuts said Investec, too, use satellite imagery, also to assess environmental impacts. However, for them, it’s not about driving alpha as part of a systematic strategy.

Smuts said that for them, it’s more about fixed income: the firm is in the early stages of using these datasets to engage with government and lawmakers on issues like deforestation to make sure that environmental, social and governance (ESG) principles are upheld.

“We can hold them [policymakers] to account. As international investors, we try to have an influence because ESG is partly about [this],” Smuts said. He predicted that investment firms will be increasingly trying to drive change around ESG issues, and having good datasets that can support conversations with public officials is going to be extremely valuable.

Smuts acknowledged that satellite data as an alternative dataset is not as developed as it could be. He said that Investec partners with the World Wildlife Foundation, which has a dataset of satellite images of natural resources around the world. The important part of this data is that the foundation has created overlays on the images, showing, for example, what is developed land versus virgin forest.

“Those overlays have been developed more recently,” Smuts said. “So the dataset is not as long as we would like. But for us, we aren’t building a systematic strategy on it. For our purposes, we are looking at the policies the government has implemented—are they being followed? When mining rights are signed and new developments crop up in protected areas, this is something we can bring with us when we talk to policymakers.”