ESG data not fit for purpose

A cohort of ESG experts argued that the current data and research available for investors is lacking. Elsewhere they urged investors to engage with corporate boards to encourage change.

Much of the current ESG research and data is not fit for purpose because it doesn’t integrate big data or the sentiment analysis that really gages what companies are doing rather than saying. Following an in-depth study into corporate purpose that assessed 800 publicly traded companies on their response to the pandemic and inequality crisis, Mark Tulay, founder and chief executive of the Test of Corporate Purpose (TCP) initiative and chief executive of Sustainability Risk Advisors, said that investors urgently need new models to help them assess and integrate ESG risk.

Speaking at FIS Digital 2020, Tulay outlined how the TCP initiative, which partnered with ESG data providers Truvalue Labs and Morgan Stanley, explored the extent to which purposeful companies, including signatories to last year’s Business Roundtable pledge to re-define corporate purpose away from shareholder primacy, performed during the pandemic.

“We did something that would be impossible with traditional ESG research. We need a new model to integrate ESG and I hope more investors push the frontier in encouraging this,” Tulay told delegates.

Alongside ratings agencies producing conflicting corporate data, an “alphabet soup” of organisations and NGOs produce different guidelines, said fellow panellist and co-chair of the TCP initiative Robert Eccles, visiting professor of management practice at Oxford University’s Saïd Business School and a leader in how companies and investors can create sustainable strategies.

Although these organizations have developed standards and are increasingly working together, he flagged investor confusion. Imagine how impossible financial analysis would be without accounting standards, he said.

“This is the situation ESG is in today.” Calling for a global body and “basic plumbing” to enable investors to integrate ESG and facilitate corporate reporting, he espoused the urgency to get behind a sustainability standard board.

Alongside the stark absence of informative data guiding ESG investment, the initiative had another key take-home – companies that performed well on ESG metrics also performed better through the crisis. However, companies that have a declared purpose to represent all their stakeholders (rather than just their shareholders) did not necessarily perform well through the crisis.

Purpose

Eccles urged investors to do more to encourage portfolio companies to adopt purpose. He said purpose should be integrated at board level and that investors should hold their fund managers accountable for pushing companies on the subject.

“Tell your portfolio companies you want a company-specific statement of purpose signed by the board,” he urged.

Fellow panellist Anthony Eames, vice president and director of responsible investment strategy at Calvert Research and Management, a wholly owned subsidiary of Eaton Vance Management, noted that more companies are rising to the challenge of stakeholder capitalism. He also said that companies’ navigation of the pandemic will have a lasting impact on their brand and reputation.

“Different corporate responses have shortened or lengthened the impact of pandemic,” he said, citing paid leave, nurturing key supplier relationships and cutting back on executive compensation as drivers of success.

Eames also reflected on the challenges inherent in current ESG data but noted important milestones around disclosure and measuring financial materiality. He urged asset managers to adopt an evolved approach that keeps up with learnings.

“We are developing as investors, finding new ways to assess companies’ performance,” he said. It led him to reference a new Corporate Resilience KPI the manager now uses to measure the governance strength of a company as a consequence of the pandemic based on its financial capacity to execute strategy in a crisis.

“This COVID KPI is under the governance pillar and underpins the strategy and competence of the management team of a company,” he said.

Next, the conversation turned to the extent to which investors are engaging with corporate boards. Eames said it was incumbent on managers, and should be written into the mandate, to communicate with client investors on how they are monitoring and engaging with investee company boards. “We are seeing more progress on the engagement front,” he said.

As for Calvert’s own progress in the area, he cited a recent initiative to measure diversity levels in investee companies, many of which don’t disclose workplace diversity. The manager contacted the companies and argued the business case for diversity, triggering some change. “It is encouraging, but we need to keep after it,” he said. “We are gaining more information to make better decisions and helping these companies with their agenda.”

Tulay concluded that corporate laggards needed to be called out, while investors should also highlight corporate success stories. “If companies are underperforming, we should shine a light, while those doing well should be recognised,” he said.