August 2, 2018

Where Do Investors Get ESG Info?

This blog from “The Conference Board” discusses “reporting fatigue” on ESG matters. In the growing universe of ratings, rankings and initiatives, it’s hard to know where to focus your limited bandwidth. This Clermont Partners survey of 189 active investors – and related interview – say that annual reports are the #1 source of ESG info for investors, followed by direct questions to the company.

What about sustainability reports? For those of you working on them, I’m sorry to say there might be some leeriness there:

– While 28% of investors said that the reports were helpful, they also said they didn’t answer all of their questions; and

– 63% of the investors said they “don’t spend much time” with them.

But your work is not for nothing. According to this survey, almost everyone turns around and uses some combination of annual, integrated & sustainability reports to answer those direct questions from investors. And when investors look to third-party ratings agencies to fill information gaps, some of that information also comes from sustainability report.

Although depending on the ratings agency, that percentage might not be as high as you think: Broc has blogged on our “Proxy Season Blog” about how company disclosures contribute only about 35% of the data underlying MSCI ratings. Also see these MSCI resources in our “ESG” Practice Area.

This blog from Globoforce’s Derek Irvine discusses why it makes sense for employee engagement surveys to be one component of ratings – organizations that score in the top 25% on employee experience report nearly 3x the return on assets and more than 2x the return on sales as compared to organizations in the bottom quartile.

Human Capital: Investor Coalition Sends 45-Page Survey

The “ShareAction Workforce Disclosure Initiative” – a 100-member investor coalition – recently sent this 45-page survey to 500 companies. The coalition says the survey is a “streamlined solution” that helps companies avoid responding to multiple surveys & data requests. They’re also encouraging companies to make their responsive information public. Here’s a summary of results from their pilot project last year.

ESG Ratings: “Wildly Divergent”?

The American Council for Capital Formation is following up on its hard look at proxy advisors – which Broc blogged about on our “Proxy Season” Blog last month – with a new 17-page assessment of four major ESG ratings agencies. It concludes that output from MSCI, Sustainalytics, RepRisk and ISS Environmental & Social QualityScore is…less than ideal. Here’s an excerpt from the press release (also see this Financial Times article):

The major rating agencies have significant disparities in the accuracy, value, and importance of their individual ratings to investors,and arguably undermine the validity of ESG investment strategies. Findings reveal significant disparities in ratings due to a lack of standardization, inconsistencies, and subjective interpretation influenced by a number of biases – including company size, geography, and industry-specific criteria.

Though modern ESG investing has been practiced for over a decade now, there is still a lack of accurate data to support the evaluation process. To meet growing customer demand and attract ESG-orientated capital, companies have begun making selective and unaudited disclosures in regard to their performance. These disclosures are then utilized by ESG rating agencies, despite the fact that there are neither standardized rules, nor an auditing process to verify company data.

The report is careful to note that it’s not saying one particular method of ESG investment is right or wrong – only that the application of ESG-related metrics & ratings into complex investment decisions remains much more an art than a science. Among other recommendations, the ACCF advocates for standardized ESG disclosures in regulatory filings, in order to help ratings agencies make more consistent judgments. It also says that the agencies should be more transparent in their process – and better adjust for size, industry & jurisdiction.

Liz Dunshee