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sultants 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 ques- tions 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 focus- ing 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 every- thing 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 indi- vidual companies. For example, for a phar- maceutical 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 per- formance. “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.” Candriam, an asset manager, has also developed its own ESG rating system and publishes its own studies on various met- rics 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 availa-
bility of the raw data from underlying com- panies 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 busi- ness 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 VIEWS
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”, McAl- lister says. “It is becoming increasingly unacceptable to rely on MSCI and Sustain- alytics 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. Even when it comes to CO₂ emis- sions, you get different scores from differ- ent 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 cal- culated. “We certainly need more standard- isation 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 strate- gies. “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 sen- tence,” McAllister says, pointing out that the job is made harder by the fact that each individual industry and geography have dif- ferent 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 roundtables I hosted last year, the head of investment at a pension scheme 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 defini- tion to judge to what degree a company is an ESG investment. With it being an umbrella term for many factors it is diffi- cult for the asset managers, index providers and consultants to establish a universal ranking system 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?”
November 2019 portfolio institutional roundtable: Responsible investing 33
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