ESG data: Land of confusion

23 Sep 2019

Separating good companies from the badly behaved is all the rage, but are investors calling it right? Mark Dunne reports.

Elton John probably wishes that everything in life is as easy as making music. Entertaining millions of people with a songbook that took 50 years to write is more blackand-white than trying to save the planet, a task that is littered with grey areas.

In August, the Candle in the Wind, Rocket Man and I’m Still Standing singer claimed that he had paid into a fund to offset the carbon footprint of a private flight he arranged for two of his royal guests. The effectiveness of this payment in fighting climate change has been disputed by Greenpeace, an environmental pressure group. Who is right and who is wrong? When it comes to some areas of the environmental, social and governance (ESG) sphere, it is difficult to know.

Yet it used to be so simple. Most investors added a company to their portfolio in the belief that its profits would rise and that they were comfortable with the risk taken for the price paid. They might have even gotten a share of the spoils in the form of dividends and hoped that the size of those payments would increase year after year.

To confirm that a company was meeting these objectives, all an investor had to do was read the audited annual report. Obviously, these motivations still lie at the heart of buy and sell orders, but today other factors are also influencing investment decisions, the results of which can rarely be found in an annual report.


Investing in assets that make a positive impact on society and avoiding badly-behaved companies was once considered a niche strategy. Not anymore.

At the beginning of 2018, $30.7trn (£25.2trn) was invested in sustainable assets globally, a 34% rise in two years, according to Global Sustainable Investment Alliance.

“Demand for ESG analysis is going through the roof across our client base,” says Tim Manuel, Aon’s UK head of responsible investment. “Increasingly schemes are asking for assessments of what it is that their portfolios are achieving, what is the difference that they are making.”

“Investors are eager to get evidence that ESG is contributing to financial performance,” adds David Czupryna, head of ESG client portfolio management at Candriam.

But can asset managers and consultants meet demand? Attitudes towards the nonfinancial risks facing corporates have changed and the investment industry is struggling to keep up. “ESG data is still a developing area,” Manuel says. “Investors rely on data which is not always available.”

The lack of robust information in this area from companies and independent bodies is causing problems. For instance, how can an investor know for sure that a company has hit its greenhouse gas emission reduction target, is using less water, has no children working in its supply chain and is keeping the personal information of its customers secure?

Without robust data to assess the performance of their assets, investors run the risk of gaining a false sense of confidence that they are doing their bit to improve society, whereas in reality they could be doing little more than running a public relations campaign, otherwise known as “greenwashing”.

We certainly need more standardisation because today we are not comparing apples with apples and pears with pears.

Helena Viñes Fiestas, BNP Paribas Asset Management


ESG is a broad church. It is not just about being kind to the environment. Leadership diversity, how the board makes decisions, the use of resources and staff welfare are among the aspects that appear on sustainable investing checklists.

Yet measuring the success in areas such as this is not an exact science. Manuel says that the industry is characterised by different approaches and that ESG rating providers are using a “high degree” of estimation. Not every company, for example, publishes its emissions data, so providers work it out for themselves.

“What that leads to is data that can be quite substantially different with a low correlation between providers,” Manuel adds. “The quality of ESG analysis is only as good as the data and the data continues to evolve and improve,” he says. “The levels of disclosure from companies will make the biggest difference to data quality.”

And corporate disclosure is improving thanks to regulation, but it is still early days. From next month on, for example, the revised EU Shareholder Rights Directive requires pension scheme trustees to explain how they are protecting savers from the impact of climate change.

Lloyd McAllister, a responsible investment analyst at Newton Investment Management, welcomes the regulation that has been introduced as a “move in the right direction”, but he is concerned that it is “three or five years behind where the market is”. He points to the EU’s ESG definitions as an example, describing them as too “simplistic”. The problem for him is that the EU definitions lead with the term “environmental solutions” which is then followed by a list of distinct areas such as renewables. “This is sustainability investing from five to 10 years ago, rather than focusing on an industry’s value chain or externalities, which is where things are today,” McAllister adds.


To fill the void, several ESG assessment methodologies have been created by consultants and asset managers.

Robeco uses its RobecoSAM subsidiary to assess the key ESG factors for individual companies that it believes will impact their financials and ability to create value. This centres on questions such as, is supply chain management more important than product safety to a certain company. The key factors identified from its assessment are then incorporated into its valuation model.

Chris Berkouwer, a portfolio manager at Robeco, says this approach is about focusing on what is applicable to a company. “RobecoSAM puts more weight on the key material factors instead of looking at the whole range of ESG in the belief that everything in ESG is relevant to that company, which is not always the case,” he adds.

BNP Paribas Asset Management takes a similar approach. It takes an in-depth look at the most material issues affecting individual companies. For example, for a pharmaceutical it would look at the integrity and reporting of how it conducts clinical trials. “It goes straight to the core of the business which is a more holistic way of looking at a company,” says Helena Viñes Fiestas, BNP Paribas Asset Management’s deputy global head of sustainability, global head of stewardship and policy. “It gives you a better sense of a company’s ESG performance. “Today, because we don’t have enough data points, a lot of the ratings are based on company policy and from that you work out an average score for the company,” she adds.

Candriam, an asset manager, has also developed its own ESG rating system and publishes its own studies on various metrics within these strategies.

Aon uses a framework based on the UN’s Sustainable Development Goals (SDGs). It condenses the 17 goals into three social and three environmental factors, which are used to assess progress in its companies, if the raw data it needs can be found. “We have found okay data that enabled us to measure some degree of the impact that we were making, but in many cases that data was scarce and barely sufficient to judge whether you could say that a portfolio as a whole was achieving some level of impact,” Manuel says. “The big barrier is the availability of the raw data from underlying companies to be able to make the assessment in terms of what it is they are achieving.” Companies are doing their bit to help in their assessment tools. As part of a strategy to make companies more efficient and to cut risk, some are identifying the material non-financial issues affecting their business and set key performance indicators (KPIs) to track and improve those issues. For a mining company, for example, that could mean how they are remediating the land, avoiding dam failure, ensuring that local communities don’t blockade roads to stop their trucks and eradicating bribery and corruption from their operations.

“It is about identifying what is material and how you measure it,” McAllister says. “That has broadly become pretty uniform now.”


Independent data may not bring the clarity many hoped it would. McAllister describes it as a “grey area”. Studies have shown that there is little correlation between the ESG assessments from different providers, such as MSCI, Sustainalytics and Bloomberg. “Some companies score very well, but the same company may score poorly on another, or even the same, set of metrics,” he adds.

When it comes to independent research “everyone is muddling their way through trying to work out what they think the financially material ESG issues are”, McAllister says. “It is becoming increasingly unacceptable to rely on MSCI and Sustainalytics because they have so often been wrong in the past.”

Viñes Fiestas has had the same experience. “If you look at data on a company from four different providers you have four different scores,” she adds. “Even when it comes to C02 emissions, you get different scores from different researchers. This is because we are at an early stage of having reliable, quality and meaningful data from companies.”

Czupryna says that he prefers to read reports from academics rather than the financial services industry. “There is no bias when the report comes from academia as they have no skin in the game,” he adds. “When it comes from an index provider it is important to check the numbers. We are also open to scrutiny about our own ratings.”

Viñes Fiestas calls for the industry to work together to harmonise areas such as how emissions and water consumption are calculated. “We certainly need more standardisation because today we are not comparing apples with apples and pears with pears.” But the ESG analysis process cannot be entirely standardised, it continues to rely on convictions and input from analysts and investors still need to consider an individual company’s business model. A company developing a cancer drug and one that is developing allergy treatment will have to manage different clinical trials, operate in different areas and have different strategies. “When we simplify things, we miss the point. Therefore, we do not judge the company,” Viñes Fiestas says.

It is not easy to define such a broad topic succinctly. “It is a difficult task to put the successful longevity of the world into a sentence,” McAllister says, pointing out that the job is made harder by the fact that each individual industry and geography have different issues to consider.

ESG is a measure of sustainability through three areas. This is part of the problem of not having neat definitions to measure investments against. At one of the portfolio institutional I hosted a roundtables last year, and a head of investment at a pension scheme that participated in the debate outlined the problem that people have. He described ESG as “three random words that have been put together”.

The point is that we are in the early days of ESG as a mainstream investment concept and these strategies are expected to be around in one form or another for some time. There is no universally agreed definition to judge to what degree a company is an ESG investment and with it being an umbrella term for many factors it is difficult for the asset managers, index providers and consultants to establish ranking systems to answer investors’ biggest concern in this area: “It sounds great, but can you show me that it is doing what you say it is?”

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