By the end of 2018, ESG investors interested in funds that screen for environmental, social and governance issues, or ESG, now controlled a whopping 25 percent of U.S. investments, Bloomberg reported in January 2019.
As a growing cohort of investors find the value in ESG investing, including alpha generation and risk mitigation, it’s not all rosy headlines: ESG investment practices and data are getting a close look, rightly so. Some recent criticism:
- “How Socially Responsible Investing Lost Its Soul”- Bloomberg News, Dec. 18, 2018
- “Lies, damned lies and ESG rating methodologies” – FT Alphaville, Dec. 6, 2018
- “Is Tesla or Exxon More Sustainable? It Depends Whom You Ask. As investors back more companies based on social factors, questions arise about how to grade them” – Wall Street Journal, Sept. 17, 2018
These stories on ESG ratings highlights an important point: they usually don’t agree. Why not? At its core, it’s hard for human experts of any discipline to agree on decision-making methods, and even when methods are shared, opinions vary. That problem, called inter-rater reliability, is detailed in this post.
So what should ESG investors do to make sure their practices hold up to scrutiny?
The best-practice checklist should include transparency, timeliness, and materiality.
Providing transparency to investors, not a ratings black box, is the core mission of Truvalue Labs. We’re a big data resource and a tool to fact-check the rater: we use machine-learning techniques to sift through millions of data points each month, delivering a robust and timely set of data and analytics to power decision-making.
Underlying events behind scores are available for deep-dive research, making Truvalue’s dataset uniquely transparent in a way that ratings decisions are not.
Beyond transparency, timeliness is a key factor for assessing ESG performance. Truvalue Labs updates its universe of companies daily. Other providers may rely on human updates to ratings, which are infrequent for most companies, perhaps quarterly or once a year.
Finally, the idea of giving primary consideration to ESG factors that are financially material to a company is relatively new, but is well-founded and increasingly understood to be a best practice.
Luckily, ESG factors that are financially material for each industry have been carefully constructed by the Sustainability Accounting Standards Board, or SASB. Established in 2011, SASB is an independent, non-profit, private-sector standards setting organization whose board includes a former chair of the SEC, former FASB Chairman, and at one time, Michael Bloomberg. Its standards are a public good, much like FASB’s standards are.
The Truvalue Labs Platform provides financially material ESG data tailored to SASB’s standards for each industry, and that allows true apples-to-apples comparisons like this analysis of Tesla and GM.