CSRHub Blog Research on ESG metrics and comments on sustainability best practice

The Third Era of ESG Investment Integration

[fa icon="calendar'] Jan 22, 2020 10:34:56 AM / by Bahar Gidwani

As the 2020 ESG (Environment, Social, and Governance) season begins, we appear to be entering the third era of ESG investment integration.

The first generation of ESG investors used data on topics such as product involvESG arrowement (alcohol, tobacco, gambling) or business practices (anti-union, involvement in Burma) to screen out “bad” companies.  These investors often relied on a single data provider and simple guidelines (e.g., <5% of revenue is OK, more than 5% of revenue is bad).

The second generation of ESG investors decided that a company’s sustainability performance should be related to its riskiness and/or its financial performance.  They used multiple ESG data sets to scan large universes of companies such as the Russell 3000 or the MSCI ACWI.  It was hard to reconcile the disparate signals from these data sets—each was based on its own methodology towards measuring sustainability.  It was also hard to get coverage across an entire investment universe.  As a result, this approach required some finesse and finagling.  An analyst or portfolio manager might have to rely on his or her own instincts or insights about whether or not a particular company would fit into a given investment approach.

The third generation of ESG integration has now begun.  The existing data sets have been broadened to improve their coverage and their providers have clarified their methodologies.  New data sets are available that offer insights that were not previously available.  A wider range of asset owners are requesting investment products that have sustainability-related claims.  This has prompted the creation of passive ETFs, single theme funds (e.g., gender lens, decarbonized), and various types of hedge funds (including long-short and short-only offerings).

As is often the case with new theories, proof of their validity is not yet available.  While many claims of investment outperformance, risk avoidance, and social impact are being made, few participants in the ESG space seem able to share evidence that supports these claims.  Academic studies are lagging far behind.  Most seem to still be mulling era 1 or 2 issues.  This is not an unusual situation for the money management market.  Many past “hot” investment ideas have turned out to be money-losing duds.

It is probably impossible to list all of the themes that are currently being pursued.  There seem to be hundreds of competing theories for how best to generate and use ESG data.  Here are few of those that have received the most attention:

Theory

Why It Might Work

Issues and Concerns

Machine Learning

Natural Language Processing can look for signals of ESG-related opportunities or risks. By going outside the scope of most traditional ESG data sets, these systems offer a chance to trade ahead of the market.

Only a small number of companies have frequent signals. Both false positives and false negatives are hard to identify in advance. Only a limited number of investors can use a system before its benefits would be arbitraged by the market.

Materiality

Certain ESG factors may be tied to a company’s success. An investor can combine data on these issues with traditional financial and market information to get a better long-range view of company’s future performance.

Various groups have attempted to identify which factors are material. However, their assessments disagree and there is little empirical support for any of these systems. In many cases, only a few companies report each factor. This makes it hard to do systematic research or to make consistent decisions across an entire industry.

Engagement

Invest in companies that have weak ESG performance. Engage with them to improve their policies and reporting. Benefit from the increased attractiveness of the company to other ESG-interested investors.

Companies may not respond well to pressure from investors on business-related matters. It may take several years for the benefits of ESG-related changes to take effect and be noticed. Most investors don’t have such a long-term investment horizon.

Factor Analysis

Dump ESG data into a quantitative model and uncover significant factors. Structure a portfolio to take advantage of the results.

Given the lack of data (most ESG indicators are not available for most companies) and the inconsistent way that ESG data is generated and reported, the quality of ESG data may be too poor to use in quant models. ESG factors may not be stable over time, as they are driven by social issues and current topics.

Passive

Include ESG factors in the list of things that can be used to “tilt” a portfolio. Position the resulting portfolio as attractive to groups of investors who care about a particular ESG-related theme.

The restrictions associated with tilting portfolios generate tracking errors and can increase the costs of managing the portfolio. This may cause passive ESG funds to systematically underperform their benchmarks.

Aggregation

Combine together a lot of different ESG data sources. Create a new rating that incorporates the information from the underlying sources, but has broad coverage and an improved ability to predict future market performance.

Averaging disparate sources of ESG data does not give good results. (This was tested in era 2.) A new method for aggregation is required—one such as CSRHub that uses Big Data methodologies to properly weight and combine a range of sources. The resulting ratings may not contain alpha (but could provide an estimate of consensus that could be used to generate alpha via other means).

 

It takes at least three to five years to determine if an investment approach has promise.  It takes another ten years to be sure that the approach will survive the test of market cycles and changes in market structure.  The first and second eras of ESG integration did not produce any huge winners or star funds.  The third era has many new ideas and approaches.  Even without solid academic foundations, we can hope that one or more of them turn into a mainstream path for ESG integration.

To learn more about CSRHub, our ESG/CSR metrics or how you can improve your ESG scores, contact us here.

 

 


Bahar_Gidwani-10Bahar Gidwani is CTO and Co-founder of CSRHub. Bahar has built and run large technology-based businesses for many years. Bahar holds a CFA (Chartered Financial Analyst) and was one of the first people to receive the FSA (Fundamentals of Sustainability Accounting) designation from SASB. Bahar worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. He has founded several technology-based companies and is a co-founder of CSRHub, the world’s broadest source of corporate social responsibility information. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub is the largest ESG and sustainability rating and information platform globally. We aggregate 230 million data points from 650+ data sources including leading ESG analyst databases. Our patented algorithm aggregates, normalizes, and weights data to rate 18,000+ companies in 141 countries across 134 industries. We track 97% of world market capitalization. We cover 12 subcategories of ratings and rankings across the categories of environment, employees, community and governance. We show underlying data sources that contribute to each subcategory’s ratings. CSRHub metrics are a consensus view (any 2 sources may have about a 30% correlation so we make sense of the disparate data). We tag companies for their involvement in 17 Special Issues. We provide Macro-enabled Excel dashboard templates, customizable dashboards, and an API. Our big data technology enables 85% full coverage of data across our rated companies and robust analyses. We provide historical ratings back to 2008.

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CSRHub Becomes an Official ESG Data Provider on Open:FactSet Marketplace

[fa icon="calendar'] Jan 9, 2020 9:31:52 AM / by CSRHub Blogging

ESG content set available for purchase now

CSRHub, one of the world’s broadest and most consistent sets of Environment, Social, and Governance (ESG) ratings, is pleased to offer ESG Business Intelligence data via the Open:FactSet Marketplace as an official provider. It is available for evaluation via FactSet’s cloud-based Data Evaluation platform now.

You can see a new video describing CSRHub’s ESG Business Intelligence data here.

CSRHub Official FactSet Provider

 

“Launching CSRHub’s ESG Business Intelligence Data on the Open:FactSet Marketplace allows us to greatly expand our reach in keeping with our mission to empower stakeholders with easy to use consensus ratings to help improve sustainability performance worldwide,” said Cynthia Figge, CEO and Co-founder of CSRHub.

“CSRHub is an excellent addition to the Open:FactSet Marketplace’s network of providers,” says Lauren Stevens, Senior Vice President, Open:FactSet Strategy, FactSet. “ESG data is in strong demand among investment managers, and this new offering gives our clients another dataset to leverage when managing risk and looking for new investment opportunities.”

CSRHub data helps investors, corporations, and consumers integrate ESG and sustainability into their decision-making processes. Using a patented algorithm that aggregates and harmonizes disparate data from over 600 ESG sources, CSRHub generates a consensus score for the ESG performance of more than 18,000 companies from 134 industries in 141 countries. Data from CSRHub’s big data process can be used to increase corporate market value, uncover portfolio opportunities and risks, and integrate ESG trends into other Business Intelligence data sets. For instance, CSRHub’s ESG signal can:

  • Identify risks and opportunities. CSRHub ratings represent the consensus opinion of a company’s ESG performance. Asset owners, portfolio managers, and investment analysts can compare their own assessment of a company against the CSRHub consensus and build alpha-creating strategies. CSRHub’s score is also used for screening potential investments and for examining the social impact of an existing portfolio.
  • Benchmark corporate ESG performance. Companies can compare their CSRHub rating to those of their peers or competitors using CSRHub’s broad industry and geographic coverage. Through these comparisons, managers can build strategies to improve upon existing practices, plan new sustainability-related programs and reporting, better manage their stakeholders’ perception of corporate values and social impact, and evaluate their brand’s CSR performance.
  • Backtest theories about ESG behavior. CSRHub offers monthly data back to 2008. Because CSRHub ratings are based on millions of data items drawn from hundreds of sources, they are stable, fit into a smooth distribution, and correlate well with other indicators. CSRHub ratings are used by hundreds of universities and have been cited in many publications.

 

CSRHub’s ESG Business Intelligence data feed is now available for purchase as an official provider on the Open:FactSet Marketplace (OFM).

For more information and to get started, see https://open.factset.com/products/csrhub-esg-business-intelligence/en-us.

 

About CSRHub

CSRHub offers one of the world’s broadest and most consistent set of Environment, Social, and Governance (ESG) ratings, covering 18,000 companies. Its Big Data algorithm combines millions of data points on ESG performance from hundreds of sources, including leading ESG analyst raters, to produce consensus scores on all aspects of corporate social responsibility and sustainability. CSRHub ratings can be used to drive corporate, investor and consumer decisions.

CSRHub
Media: Ruth Edwards
csrhub.news@csrhub.com

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Does Bigger Mean Better?

[fa icon="calendar'] May 22, 2019 9:58:43 AM / by Bahar Gidwani

Do bigger companies get better ESG ratings than small ones?  We believe the answer is “no.”  This seems true across a wide range of companies, whether one measures size by revenue or by market capitalization (a proxy for enterprise value).  Our result indicates that small companies can and should expect to be able to equal or outperform their bigger rivals on environment, social, and governance (ESG) issues.

A comparison of charts from our new Bloomberg app (ESGHub) indicates that big companies disclose more information than small ones.  The chart on the left shows the distribution of disclosure for the S&P 500 Index.  There is a wide dispersion of disclosure profiles (as measured by Bloomberg’s ESG Metrics on the bottom axis) and CSRHub’s consensus ESG rating (as shown on the vertical axis).  The chart on the right shows about 1,500 companies from the NASDAQ 3,000.  There are some companies spread out on the right.  However, many companies are clustered to the left with low disclosure scores.

S&P 500 Index vs NASDAQ 3000

Even though the smaller companies are hard to distinguish based on their disclosure, they do separate on the vertical axis (aggregate ESG rating).  The left-right distinction does not appear to be related to size.  As you can see below, larger companies have only a small tendency towards higher disclosure ratings from Bloomberg.

 

Low Correlation Bloomberg ESG Metrics Disclosure Score and Revenue 

The aggregate ESG ratings from CSRHub also do not appear to be driven by either revenue (left chart below) or market capitalization (right chart below).  This pattern has been stable for at least the past five years.  One theory is that the sustainability story of smaller companies may be simpler and easier to tell than those for large ones.  Smaller companies may also appear more credible on ESG issues, due to cultural biases against “big business.”

 

No Correlation Overall CSRHub and market cap2 

 

Download the full report

 


Bahar_Gidwani-10Bahar Gidwani is CTO and Co-founder of CSRHub. Bahar has built and run large technology-based businesses for many years. Bahar holds a CFA (Chartered Financial Analyst) and was one of the first people to receive the FSA (Fundamentals of Sustainability Accounting) designation from SASB. Bahar worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. He has founded several technology-based companies and is a co-founder of CSRHub, the world’s broadest source of corporate social responsibility information. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub is the largest ESG and sustainability rating and information platform globally. We aggregate 204 million data points from 634 data sources including 10 leading ESG analyst databases. Our patented algorithm aggregates, normalizes, and weights data to rate 18,000 companies in 139 countries across 134 industries. We track 97% of world market capitalization. We cover 12 subcategories of ratings and rankings across the categories of environment, employees, community and governance. We show underlying data sources that contribute to each subcategory’s ratings. CSRHub metrics are a consensus view (any 2 sources may have about a 30% correlation so we make sense of the disparate data). We tag companies for their involvement in 17 Special Issues. We provide Macro-enabled Excel dashboard templates, customizable dashboards, and an API. Our big data technology enables 85% full coverage of data across our rated companies and robust analyses. We provide historical ratings back to 2008.

 

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ESG Coverage Is Improving

[fa icon="calendar'] May 10, 2019 10:21:52 AM / by Bahar Gidwani

We recently reviewed the ESG coverage status for the 8,686 companies in the MSCI ACWI (All Country World Index).  The ACWI is a popular benchmark for many investors, because it includes approximately 85% of the global opportunities for equity investment.  We felt it would be useful to see how much ESG information is currently available on the companies on this type of broad index.

CSRHub aggregates ESG data from more than 600 sources.  Each source has a different coverage universe.  By combining these universes, we have been able to offer full or partial ratings on 18,000 companies and know that there is at least some information on another 13,000 companies.

As you can see from the table below, we have reached the point where there is CSRHub ESG data on 95% of the companies and 99% of the “weighted value” in the Index.  5,777 companies (81% of the index weight) have full CSRHub scores (overall rating and scores for Community, Employees, Environment, and Governance factors).  Another 1,116 companies (13%) have partial scores while 1,324 companies (15%) have some data, but not enough yet to allow calculation of a CSRHub rating.

MSCI All Country World Index Analysis

We do not have data on the past components for this Index.  However, we can look at the status for the current companies over the past five years.  (CSRHub data reaches back to 2008.)  As you can see below, there has been a dramatic improvement in the number of companies with ESG data over this time period.

CSRHub ESG Ratings Data More Entities

One benefit of this increase in coverage is that ESG ratings can now be extended to cover corporate bond and high-yield debt portfolios.  In a recent study of one such portfolio, we found full or partial ESG ratings in CSRHub on 1,681 of 1,789 holdings—94% coverage.  It remains difficult to put ESG scores on sovereign and municipal bond issues.  However, we have ratings now on many universities, cities, and states.  We may also be able to impute a rating for a locality, based on the ratings of the companies that are headquartered there.

One of the excuses made for not integrating ESG information into corporate or investor decision-making has been that there are too many gaps in ESG data.  It appears that the hard work of ESG sources around the world are gradually filling in these gaps so that we can create a consistent and holistic view of relative ESG performance for a wide range of entities.

 

Download the full report

 


Bahar_Gidwani-10Bahar Gidwani is CTO and Co-founder of CSRHub. Bahar has built and run large technology-based businesses for many years. Bahar holds a CFA (Chartered Financial Analyst) and was one of the first people to receive the FSA (Fundamentals of Sustainability Accounting) designation from SASB. Bahar worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. He has founded several technology-based companies and is a co-founder of CSRHub, the world’s broadest source of corporate social responsibility information. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub is the largest ESG and sustainability rating and information platform globally. We aggregate 204 million data points from 634 data sources including 10 leading ESG analyst databases. Our patented algorithm aggregates, normalizes, and weights data to rate 18,000 companies in 139 countries across 134 industries. We track 97% of world market capitalization. We cover 12 subcategories of ratings and rankings across the categories of environment, employees, community and governance. We show underlying data sources that contribute to each subcategory’s ratings. CSRHub metrics are a consensus view (any 2 sources may have about a 30% correlation so we make sense of the disparate data). We tag companies for their involvement in 17 Special Issues. We provide Macro-enabled Excel dashboard templates, customizable dashboards, and an API. Our big data technology enables 85% full coverage of data across our rated companies and robust analyses. We provide historical ratings back to 2008.

 

 

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CSRHub’s Bahar Gidwani Speaking at ESG5 Summit

[fa icon="calendar'] Mar 26, 2019 10:04:06 AM / by CSRHub Blogging

Skytop Strategies will launch its ESG5 Summit on April 4th in New York. ESG5_new_2019-01CSRHub Co-founder and CTO Bahar Gidwani will be speaking on Materiality: Aligning Materiality to Your Company’s Business Model.

The growing focus on the implementation of environmental, social and governance standards and best practices is driven by increasing scrutiny of the public markets, their analysts, and institutional investors; and growing emphasis on transparency and accountability in today’s global markets. As a result, capital markets now engage regularly in discussions on how to assess the value of ESG practices on overall company performance, working with companies that integrate ESG into their performance equation to quantify, qualify and assign added-value by experts making buy, sell or hold recommendations.

Engage with experts and learn how to apply ESG considerations to your company and your investments.

Materiality: Aligning Materiality to Your Company’s Business Model

Moderator:
David A Lubin, Co-Chairman and Managing Director, Constellation Research and Technology, former Co-Chairman and Managing Director, Renaissance, and Executive Chairman, Palladium
Panelists:
Bahar Gidwani, CFA, FSA, Co-founder & CTO, CSRHub
Cathy Hansell, Founder and President, Breakthrough Results
Richard F. McMahon, Jr., Senior Vice President, Energy Supply & Finance, Edison Electric Institute
Virgus Volertas, Senior Analyst | Corporate Governance, UAW Retiree Medical Benefits Trust

APRIL 4, 2019 
ROYALTON PARK AVENUE 
420 PARK AVE SOUTH 
NEW YORK, NY

For the full program, click here. Receive a 35% discount off the dated price using coupon code CSRHUB2019. Register today.

 


Bahar_Gidwani-10Bahar Gidwani has built and run large technology-based businesses for many years. Bahar holds a CFA (Chartered Financial Analyst) and was one of the first people to receive the FSA (Fundamentals of Sustainability Accounting) designation from SASB. Bahar worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. He has founded several technology-based companies and is a co-founder of CSRHub, the world’s broadest source of corporate social responsibility information. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.

CSRHub is the largest ESG and sustainability rating and information platform globally. We aggregate 180M data points from 610+ data sources including 10 leading ESG analyst databases. Our patented algorithm aggregates, normalizes, and weights data to rate 18,000 companies in 132 countries across 136 industries. We track 97% of world market capitalization. We cover 12 subcategories of ratings and rankings across the categories of environment, employees, community and governance. We show underlying data sources that contribute to each subcategory’s ratings. CSRHub metrics are a consensus view (any 2 sources may have about a 30% correlation so we make sense of the disparate data). We tag companies for their involvement in 17 Special Issues. We provide Macro-enabled Excel dashboard templates, customizable dashboards, and an API. Our big data technology enables 85% full coverage of data across our rated companies and robust analyses. We provide historical ratings back to 2008. 

  

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