Some industries—such as concrete, and extractive industries like oil and gas drilling—are major polluters and contributors to climate change, but they’re integral to human civilization. Investment professionals may opt to leave these companies out of portfolios that screen for or are tilted according to environmental, social, and governance (ESG) criteria. However, alternative data providers are offering data to help portfolio managers recognize the greening efforts of corporates in extractive sectors.

It’s important to include these industries in some portfolios, says Blake Scott, president at alternative data provider Waste Analytics. While demand for oil is decreasing, the world is still heavily reliant on fossil fuels. Active investor engagement will encourage companies in these sectors to make genuine moves toward greening their technologies—particularly when it comes to how they deal with the waste they produce in their extractive practices.

“If you don’t invest in them, you are going to create a situation that at some point, when we get to the place where oil and gas are not the main drivers of energy, these liabilities will be left to the general public to clean up, and from a personal perspective, I think that is unacceptable,” Scott says.

Prior to his current role, Scott ran a company that recycled oil drilling waste. In 2018, he founded Waste Analytics, which focuses on data on the waste that oil and gas companies produce as they drill. The vendor is currently trialing its data product with asset managers.

Drilling for oil produces both fluid and solid waste, including salts, heavy metals, and wastewater, which can be disposed of in different ways—some more sustainable than others. Waste Analytics provides waste datasets gleaned from corporate reports and regulatory filings. Each company has its own level of disclosure, and Waste Analytics investigates whether the company has a sustainability report, and within that, if it collects relevant information on waste.

Waste Analytics also provides waste volume and management data, which classifies waste by type, disposal method and volume. And it provides a risk-adjusted estimated environmental liability for the drilling waste. The vendor has developed a proprietary methodology for such calculations that considers where the drilling is happening and the types of waste it produces.

Scott says waste data can be used by investors for negative and positive ESG screening of companies, regulatory compliance, and to predict future financial performance. 

“We are at a place regarding ESG data where you have to determine the materiality of that data. And that’s what we are beginning to show here because that environmental liability is not something that’s been seen on the balance sheet,” he says.

The vendor also provides its proprietary Feer Rating, a system to rate companies based on metrics associated with their waste management practices.

The oil and gas industries are considered controversial by some investors, due to decades-long histories of environmental disasters, unsafe extractive practices, drilling on indigenous land, and funding dictatorships. These sectors have made gestures towards greening their operations—switching to renewable energy, for example. Many of the world’s biggest energy firms, including BP, TotalEnergies, and Shell, have pledged to achieve net-zero greenhouse gas emissions by 2050, the European Union deadline for carbon neutrality. The EU also recently proposed a ban on the sale of new petrol and diesel cars by 2035. All of this could have a cumulative effect on how investors approach the oil and gas industry.

Some analysts and portfolio managers fully screen oil and gas companies from ESG portfolios, says Axel Pierron, associate director of client relations at Sustainalytics. But, he adds, his firm has investment professional clients that want to keep investing in these companies and want them to adhere to best practices.

To understand how these companies stack up against one another, and to be able to track their sustainability impact, analysts need data. Alternative data is one way to get a more in-depth look at the ESG performance of an industry that is under a lot of pressure to adopt more sustainable methods. For investors, the performance of the ESG data around these companies can also have an important impact on their financial performance.  

Another alternative data provider, Sentifi, looks at Twitter, news, and blogs to find data about companies, commodities, and events, such as oil spills, that could impact corporates’ valuations. 

“We would capture the company that was responsible for the oil spill. We would look at the sentiment and attention shifts around that oil spill,” says Sentifi CEO Marina Goche. “How is that oil spill being perceived for the company? How is that oil spill being perceived relative to peers who may have had oil spills? How has this particular oil spill been perceived relative to previous oil spills by this particular company? Is it likely to impact the asset price? We look at the sectors and industries that are impacted by this oil spill,” Goche says.

The data would be collected from Twitter, news reports, chat forums and blogs. It would include discussions on Twitter around the spill, including the credibility of the various sources.

“Not every source that discusses a particular issue is a credible source,” Goche says.

The vendor has developed a machine learning model that analyzes the credibility of a source by looking at factors such as the source’s identity, whether the content is unique or merely a retweet of another source, if it’s a bot, and what types of followers the source has on Twitter.

Investors need to evaluate each vendor according to what they plan to get out of the data.   

Data providers such as Waste Analytics and Sustainalytics gather data from corporate sustainability reports. However, reporting is still not practiced to the same level by all corporates, and it remains unstandardized across the world.

In most cases, inaccurate or insufficient corporate reporting is about a lack of capacity or knowledge within an organization. In some cases, though, it’s an outright massaging of the truth. Scott says that one US-based oil company, for example, states in its sustainability report that its disposal of drilling residue is tightly regulated. However, Scott says, its method is simply to bury the waste, which is not an environmentally friendly approach.

“I don’t consider that to be highly regulated. Investors need to be able to understand this to see what’s going on,” he says.

Pierron says Sustainalytics has a research committee that evaluates the consistency and coherence of the data the company collects. If a company is underreporting ESG data, Sustainalytics researchers use proxies to gauge the actual level of sustainability in its practices—for example, by estimating the number of barrels of oil a company is getting from their oil drilling sites every day.