As the desire to invest in sustainable and responsible companies has grown, the quantity of sustainability-related information reported about businesses has increased significantly. Building off decades of work from non-profits such as CERES and other NGOs, a number of industry groups have introduced standardized methods for evaluating and reporting sustainability metrics. This effort will improve the quality of information available—and help drive business and policy changes.
Current Efforts to Standardize Measurement
Greater transparency and consistent reporting standards for environmental, social, and governance (ESG) factors are desirable. Today, there are a number of efforts to do this, backed by a wide array of stakeholders. For example:
- The Global Reporting Initiative (GRI)’s Sustainability Reporting Standards gives companies a way to measure, understand, and communicate their organization’s profile, strategy, ethics and integrity, governance, stakeholder engagement practices, and reporting process.
- The Principles of Responsible Investing (PRI), formed in 2005 under the aegis of the United Nations, offer a menu of actions for incorporating ESG issues into investment practices across asset classes. According to PRI, responsible investment “is a process that must be tailored to fit each organization’s investment strategy, approach, and resources.”
- The Sustainability Accounting Standards Board (SASB) is an independent standards setting organization focused on enhancing the efficiency of capital markets through disclosure of material sustainability information; the organization created a series of sustainability accounting standards that will be used and reported upon by companies across the different sectors of the market.
While significant progress has been made to standardize reporting methodologies, not all ESG information is, or should be, quantifiable. In addition, ESG data providers—including Sustainalytics, MSCI, ISS, and EIRIS—who use the reporting agencies’ data, along with their own research, weighting methodologies, and scoring systems, may at times produce scores that reflect their own input, sampling, or other data mining biases. For example:
- One platform may produce a “C” rating for a company on the basis of what it perceives as governance issues, environmental conflicts, or limited social involvement based on readily available, public information.
- Another ESG data provider might rate the same company with an “A” score because the company produces significant revenues from sustainable products and has what it considers only minor governance issues.
Both data providers in the example above have access to the same reports, but each weighs the findings differently and comes up with their own score. In addition, the provider may be limited in their research pursuit because they rely upon only publicly disclosed information, and many companies may not disclose practices that would otherwise impact the ultimate ranking.
Such situations create problems for SRI index funds that base company inclusion on the “score” reported by a particular ESG rating provider. In fact, we often discover that the scores do not align with our conclusion about the merits of the company from a sustainability perspective. The comparison peer group may be inappropriate, the inputs may be incomplete, or the scoring methodology may ignore or otherwise underweight key factors.
The Role of the Investment Team
Our team at Cambridge Trust performs our own in-depth research, analysis, and interpretation to determine if a company is appropriate for Cambridge Trust’s Sustainable and Responsible Investment strategy.
We developed a framework for evaluating companies for investors who wish to place a greater emphasis on ESG and sustainability factors.
This article is for informational purposes only and should not be construed as investment or legal advice.
- It starts with fundamental research, where our primary objective is to invest in high quality companies that are undervalued.
Companies are examined through the standard lens by which we research all companies, including a company’s investment outlook, market, risks, and appropriate valuation. A company’s current performance is considered along with measurable future performance objectives.
- Every company is also researched from an ESG perspective, looking at its environmental and social impact, as well as the strengths and risks of its governance structure.
While ESG research and analysis adds time to the traditional fundamental research process, we believe this analysis reveals leading indicators of a company’s future performance, mitigates business-specific investment risk, and can improve a portfolio’s long-term performance.
This article is for informational purposes only and should not be construed as investment or legal advice.
