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Aug 04, 2014 Bahar Gidwani

The Next Frontier for CSR Measurement

By Bahar Gidwani

The folks at S-Network Inc. invited me to speak at their 2014 Summer In the City Investing Summit about the state of CSR measurement for nonpublic and emerging market companies.  I was joined by Rekha Unnithan of TIAA CREF and Christina Alfonso of Madeira Global.

CSRHub has a lot of data on nonpublic and emerging market companies.  About one third of the ~9,000 companies we rate fall into this category and we have some data already on another 100,000 smaller entities.  It was a pleasure to have the chance to talk with an audience of fund managers, sustainability professionals, and pundits about something other than the “Global 1,000.”  S-Network Inc. and their partner Thomson Reuters always sell out this event, so we had a good-sized crowd in attendance.

Despite how little attention they get, smaller companies and not for profit enterprises are a huge part of our economy.  For instance, the top 2,000 U.S. companies employ only about one third of U.S. workers.  Improving the sustainability performance of smaller companies could make twice as much difference to our economy, as further improving the performance of the largest ones.

The rightmost column above uses data from CSRHub’s database to show that there is a big gap between the information available on the CSR performance of the big companies and that of the rest.  The average big company has more than 10 different sources of ratings.  Middle-sized companies have an average of 1.5 rating sources.  Smaller companies have almost no rating sources.  (CSRHub ingests data from 325 ratings sources, and should be a comprehensive sample of what is currently available.)

There is another layer to consider.  Many of the smaller entities in our economy are private, for-profit companies.  But, many others are not-for-profits (e.g., charities, religious organizations, and social groups) or government entities (e.g., universities and state, local and federal agencies).  If we have little data on smaller entities in general, we have even less on the 31% (in the U.S.) that are not commercial and profit-oriented.

I didn’t get into how this type of data looks for emerging market companies.  But, the stats are similar.  We know a lot about a few big companies in those markets and much less about smaller public and private companies and those in the not for profit sector.  As a result, we can measure the CSR performance of only a small portion of smaller companies, not for profits, and governmental agencies.

My fellow panelists added several interesting insights to these basic facts.  Both Reyka and Christina had personal experience investing in non-public entities—both here and abroad.  They spoke about the effort it took to dig out and analyze social performance factors on smaller entities—the firms that provide ESG (environment, social and governance) data on bigger companies can’t do the same for thousands of smaller ones.  They had to spend more time and money to do this specialized research.  But, doing so created an “information asymmetry” that gave them an “edge” and allowed them to generate above-average returns.

Christina works with investor groups who want to develop socially responsible investment (SRI) strategies.  She noted that some of these groups were “impact first” and some were “financial first.”  For the former, it is important to provide high quality data on the social impact of investments—something that is often hard to do with private companies.  For the latter, it is important to provide good estimates of the expected financial return from a private investment (or investment into a project led by a not for profit or government entity).  This is also hard to do, and requires different skills than impact assessment.

Finally, given the investment orientation of our audience, the panel stepped back and took a “big picture” view of smaller company and developing world impact investing.  We agreed that these investments were likely to have different patterns of return and risk than traditional large company investing.  As such, they could be considered a distinct “asset class” (e.g., like stocks, bonds, physical commodities, real estate, and private equity investments).  “Modern Portfolio Theory” would say that adding asset classes improves diversification and that this by itself should make non-public and developing market investments attractive to rational investors investor.  It seemed that our audience did not disagree with this argument.  In fact, many audience members approached my panelists after the talk, to get more information from them about launching their own new investment efforts, in this area.

Bahar GidwaniBahar Gidwani is CEO and Co-founder of CSRHub.  He has built and run large technology-based businesses for many years. Bahar holds a CFA, worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. Bahar has consulted to a number of major companies and currently serves on the board of several software and Web companies. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. Bahar is a member of the SASB Advisory Board.  He plays bridge, races sailboats, and is based in New York City.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on 8,900+ companies from 135 industries in 102 countries. By aggregating and normalizing the information from 325 data sources, CSRHub has created a broad, consistent rating system and a searchable database that links millions of rating elements back to their source. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.

Published by Bahar Gidwani August 4, 2014