The investment community needs access to better social and environmental data

One of the recurring questions in discussions around responsible investment is whether investors actually pay any attention to the data and information provided by companies about their social and environmental performance.

Companies frequently complain that investors “never ask about corporate responsibility issues” in meetings between CEOs and analysts/fund managers, and take this as an indication that investors have no interest at all in this type of information.

A recent Harvard Business School working paper by Robert Eccles, Michael Krzus and George Serafeim challenges this argument, and suggests that there is in fact a growing investor interest in corporate responsibility information.
Using data from Bloomberg, they analysed the number of times different environmental, social and governance (ESG) were “hit” (ie the number of times a user accessed that particular data point) over the period November 2010 to April 2011.

The information investors look at

While, as the authors acknowledge, the fact that a data point was accessed says nothing about how or if at all that information is used, their data provides some valuable insights into the ESG information that investors do look at.

First, the data point accessed most often is a company’s overall disclosure score. This score, calculated by Bloomberg, assesses a company in terms of how many of the range of possible metrics the company is reporting. That is, it is a measure of the breadth of reporting.
Second, there is significant interest in greenhouse gas emissions-related data (total emissions and emissions broken down in line with the Greenhouse Gas Protocol’s Scopes 1, 2 and 3). This interest is particularly strong on the sell-side, presumably because this data can be directly integrated into financial/discounted cash-flow models.

Third, relatively few investors seem to be looking at data relating to social issues. This probably reflects the practical challenges faced by investors in integrating issues such as human rights into their investment decisions (see, for example, this Ethical Corporation story).

Fourth, the non-financial information in Bloomberg’s database received a total of almost 44 million hits. The paper – in a disappointing omission – does not put this into context (eg by providing comparable information on the number of investors accessing data points such as total sales or EBITA). But the authors do at least note “…the data clearly shows that the market is paying at least some information to nonfinancial information although clearly not to the same degree as traditional financial information”.

For the few?

When one considers that the number of Bloomberg users is numbered in the hundreds of thousands and that Bloomberg provides data on many thousands of companies, this suggests that it is only a small proportion of Bloomberg’s users that are actually accessing non-financial data and/or they are looking at relatively few companies.

The wider question is what this means for corporate reporting and for the manner in which investors use, or are likely to use, the data provided by companies.

A recent paper prepared by Matthew Haigh and Matthew Shapiro for the Carbon Disclosure Standards Board suggests that investors can be expected to use data on greenhouse gas emissions if the information is made available in familiar modes such as analyst reports and screen dumps provided by data providers.

In that context, they note that: “Some interviewees believed that Bloomberg’s supply of company environmental data to the capital markets had established the legitimacy of environmental investing.” However, when Haigh and Shapiro interviewed investors, they found: “Investors examined in this study claim to use company carbon reports despite being dissatisfied with those reports.”

Quality vs quantity 

This lack of attention to data quality (or the prizing of data availability above data quality) is, implicitly, confirmed by the results presented by Eccles etal. Their research indicates that Scope 1, 2 and 3 greenhouse gas emissions data are being accessed equally (as measured by the number of hits each receives), suggesting there is limited differentiation between the relatively more reliable Scope 1 and 2 data and Scope 3 data.

A similar inference could be drawn from the emphasis being placed on ESG disclosure scores, which captures the breadth of reporting rather than the quality of reported information.

None of these comments should be taken as particular criticisms of responsible investment. The reality is that we are where we are, and that the integration of ESG issues into investment decision-making remains in its early stages of development, with many investors having yet to substantially explore how these data may be used in investment decision-making.

The two papers discussed here do, however, point to a central challenge if we are to make progress: to be really useful, nonfinancial data needs to be of much higher quality than is the case at present.

For that to happen, investors need to pay much greater attention not just to the fact of reporting but to the quality of what is being reported. As yet, there are limited signs that this is happening. The mantra seems to be one of “Give me data, any data” rather than “Only give me high quality data”.

Dr Rory Sullivan is an internationally recognised expert on corporate responsibility, climate change and investment-related issues. He is strategic adviser at Ethix SRI Advisers, a senior research fellow at the University of Leeds and a member of Ethical Corporation’s advisory board.

 



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