ESG investing is growing in popularity as the emphasis has shifted from values to shareholder values, but the portfolio strategy is suffering from the lack of an ability to compare companies easily as they can do with financial statements, Photo credit: GettyGetty
Environmental, social and governance (ESG) corporate performance metrics are in their infancy compared to financial statements, a Securities and Exchange Commission forum on socially responsible investing was told Thursday.
The assertion was made by Janine Guillot, director of capital markets policy for the Sustainability Accounting Standards Board.
She said there is a need for a widespread common language for investors and companies in ESG like there is for financials.
Formed by Michael Bloomberg with former SEC Chair Mary Schapiro as a once-vice chair, SASB is the most relied upon of over 100 think tanks, investment managers and consultants who are creating ESG standards.
Standards C-Suite executives can employ and investors can use to make apples-to-apples financial comparisons between companies they are considering investing in on the financial impact of ESG factors from diversity to carbon emissions.
While ESG investing grows mainstream and the focus shifts from values to shareholder value, it is one of the most difficult portfolio strategies to pull off.
The biggest obstacles include a lack of reliable data and the absence of generally agreed standards within a specific industry and the corporate universe along with a hands-off attitude to ESG by the SEC.
SEC Chairman Jay Clayton said Thursday at the Commission should not require public companies to follow SASB and other third-party standards on ESG.
He was rebuffed by CalPERS Sustainability Investment Director Anne Simpson it is time to bring ESG into the regulatory arena.
“There is a risk the noise will affect investors and companies badly,” said Simpson, a top executive in California’s public employee pension system with hundreds of billions in assets.
The lack of easily comparable ESG data and metrics was a consistent drumbeat at the forum under the aegis of the SEC Investor Advisory Committee.
SEC Investor Advocate Rick Fleming noted global multi industry companies have the ability to consolidate financial statements.
“I’m not sure how they can do that with ESG and sustainability,” said Fleming.
Adding his take on the greater ease of apples-to-apples comparisons of companies through financial statements than ESG disclosures, AFL-CIO Policy Director Damon Silvers said with financials there are a number of single metrics that can be displayed side-by-side such as the cost of goods sold.
However, he noted there are far fewer with ESG and sustainability. He pointed to carbon emissions as one.
But while ESG factors are harder to precisely uncover, Silvers said the work is worth doing: “There is strong evidence in our lifetime (ESG) issues are highly material to investors.”
The AFL-CIO policy chief’s claim was buttressed by State Street Global Advisors Research Executive Jennifer Bender.
“There is an explosion of data showing strong ESG performance equals better operating and stock performance,” said the State Street executive.
A SASB unit chair and founding member of the Public Company Accounting Oversight Board Goelzer argued the SEC doesn’t have a majority of its Commissioners to adopt rules to spur ESG standards.
“There’s a lot the SEC can do through its bully pulpit,” said the Washington outside corporate counsel.
Most large companies are making voluntary ESG disclosures.
But without industry-wide or business-wide standards executives can cherry pick ESG criteria that make their companies look good, asserted Bloomberg Sustainable Business & Finance Global Head Curtis Ravenel.
The fuzziness of the concept of socially responsible investing has created an unmanageable situation for companies trying to figure out which ESG matters are important to investors and which aren’t, said
The Travelers Companies Associate Group General Counsel Yafit Cohn.
Cohn said responding to ESG inquiries are costing companies significant time and resources.