I- Data is essential to effective
sustainability, ESG, and responsible investing
Data is important to the ESG
movement because it contains key ingredients.
Without proper data,
investors, issuers and policy-makers can't properly quantify the effects of
their decisions or choices about resource allocation.
Because of this lack of available
data, as well as the limited amount of information disclosed and shared, data
providers and rating agencies have historically provided information that they
deemed most important.
For example, emissions data is
significant for a business dealing with heavy industries, but not for a
business dealing with finances.
Companies shouldn't just track
their metrics, they should track their ESG metrics using frameworks and
standards that exist outside of the company.
These metrics should be consistent,
reliable and of high quality.
Understanding the goals of a
company is crucial when gathering information about their social and
environmental goals.
This is why understanding
company goals is important when analyzing data. Current practices assume that
ESG data needs to be interpreted and integrated with other information to
provide a specific solution to a specific problem.
It's anticipated that this
will be harder than simply integrating ESG data into decisions.
II- There are multiple ways to
collect data on an organization’s social and environmental impacts
ESG metrics focus on the
performance of companies in regard to the social, environmental and governance
departments.
Creating a list of ESG
measures requires selecting standard measures that should be followed by all
major corporations.
This can be done by separating
the measures into three categories: Governing, Environmental and Social.
Because this category is
easily understood and targeted, a system already exists for tracking its
impact.
Companies can measure and
implement solutions such as environmentally friendly materials and practices to
help reduce their ecological footprint.
They can also track the water
and energy efficiency of their systems.
Meeting societal and
environmental expectations ultimately affects an organization's social license
to operate.
As these pressure build up, an
organization's ability to do this could ultimately be affected.
Companies can become socially
unacceptable when their products, business practices or brand enter the realm
of negative social acceptance.
This can lead to a business
model becoming unsustainable.
Solving the social and
environmental issues created by current business practices is just good
business.
It helps earn new customers,
attract and keep talented colleagues, reduce costs, increase efficiency, and
minimize risk and damage to its reputation.
Open communication with the
public shows a company cares about what they have to say.
Capitalizing on new trust
results in this capitalizing on value determined through dialogue.
III- Different types of data can
offer different insights into an organization’s risk profile
As the field is only regulated
to a limited extent, most companies self-declare, with the data framed favorably.
Companies also change what
they report and how they report it from year to year.
Coupled with the limited data
history in some cases, due to its relatively young lifespan, it is difficult to
gather useful information.
A company's rating can vary
widely depending on the rating agency.
As ratings are unregulated and
can be subjective, it is not uncommon to get two ratings from different
agencies that are very different on the same company.
The United States SEC has
announced plans to update its disclosure rules regarding (1) climate risk, (2)
human capital, including workforce diversity, board diversity, and (3)
cybersecurity risk.
IV- There are a number of
considerations to make when choosing which esg metrics to use
It should be kept in mind that
when generating an ESG score, suppliers are often trying to quantify the
intangible and difficult to measure, so the expectation of ESG scores should be
realistic: this is a starting point, you get an indicator but not the whole
story.
There is no standardized
approach for the calculation or presentation of the various ESG measures.
Investors can use a variety of
analytical approaches and data sources to address ESG considerations, including
weighting based on client interest and potential value.
Understanding the leeway of
different metrics can provide a more complete picture of ESG risks and
opportunities.
The World Economic Forum describes
the indicators as "intentionally based on existing standards, with the
short-term goal of accelerating agreement among major private standard setters
and bringing greater comparability and consistency to ESG reporting."
