AI Is Helping Open ESG Investments to Quant Funds: Cerulli

According to Cerulli, providers are currently drawing on unstructured data from multiple sources to analyze thousands of companies every day, including news outlets, social media, nongovernmental organizations and Google trends.

Investors can now measure intangible factors that account for up to 80% of a corporation's value — such things as brand value, innovation levels or employee satisfaction.

How does this work in practice?

Cerulli reports on one asset manager that uses raw and unstructured data to build an initial "input layer," which combines companies' own reporting with external information gathered from more than 50,000 sources in 15 languages to create a daily view of some 7,000 companies around the world. The technology filters out fake news.

This vastly improved access to data is changing how asset managers integrate ESG, enabling them to come up with new investment themes, Deveikyte said. In one trend, it is allowing more long-only strategies.

In another trend, the flow of data is introducing more short-term, reactive strategies. These were traditionally difficult in ESG because of the slow pace of change, accentuated by the lag in reporting data, according to Deveikyte.

Cerulli research in the U.S. concluded that, although infrastructure existed for the likes of Amazon and Google to enter the asset management market, the attendant complexities in serving retail investors would present such firms with big challenges in terms of scaling their core businesses.

The research also found that a growing number of Asian asset managers were using AI technologies in portfolio construction or exploring its use in their investment processes.

However, only large players are able to afford the high costs of building quantitative teams and applying AI, likely leaving smaller companies in the competitive dust. This could fuel consolidation in the industry, Cerulli said.

— Check out New DOL Bulletin Muddies ESG Waters on ThinkAdvisor.