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

New Wave of ESG Demand

[fa icon="calendar'] Jul 22, 2020 9:37:25 AM / by Bahar Gidwani

This past year of social and environment pressures (Covid-19, racism inequity, climate change, global risks) has created a new wave of demand for ESG data and insight. A growing number of corporates, professional firms and financial asset owners and managers are interested in ESG.

For example, more than 2,800 investors, representing 90% of world financial assets have now committed to the UN Principles for Responsible Investment (UNPRI). In response, companies are clarifying and harmonizing their reporting methodologies. More companies are reporting sustainability information. Around 50,000 entities have shared information about their sustainability performance either directly (about 12,000 have incorporated sustainability data in their public filings) or through participating in sustainability-related organizations or reporting systems.

ESG data providers are participating in this new wave of investor interest by offering:

  • Broader coverage of entity types (i.e., public, private, not-for-profit) and coverage of more types of investments (e.g., equities, debt, REITs)
  • Comparable, stable scores with enough history that an ESG factor can be used in a quantitative model or automated screening process
  • Methods for integrating ESG with other financial and market return data sets

In previous articles we have referred to this new wave as “third-era” investors are driven to integrate ESG data by three themes:

  • Marketing. In order to attract and retain assets, investors highlight their ESG methodology and follow it, even if it may result sometimes in underperformance.
  • Risk avoidance. Asset managers who prioritize safety and downside reduction may see ESG data as an additional tool for identifying and avoiding risk.
  • Materiality. Quantitative analysts have been using “alternative” data sets for years. ESG data may provide a new opportunity for algorithm-driven alpha generation.

ESG data is being integrated into investment processes through direct purchase of individual data sets. They are also being integrated into various types of data curation and distribution systems. ESG data used to be a subcategory of “alternative data.” It has now become its own category and the number of providers and variety of data sets available has grown. 

The new wave or “third-era” investment strategies will rely on data sets that have these characteristics:

    • Broad, deep coverage. To be useful in an investment process, a data set should cover not only the equities an investor already holds, but also most if not all equities in similar entities. In some industries, there are large privately held competitors. ESG-oriented analysts should like data sets that also cover private companies.
    • Streamlined factors, complete coverage of the factors, and a long stable history. Some ESG data sets offer two hundred, one thousand or even several thousand indicators. This amount of detail can overwhelm investors who are relatively new to ESG issues. It is also difficult to fill in all of “slots” in a data set. Many major ESG sources cannot complete 70% or more of their bottom level of indicators. Finally, most financial analysts are used to being able to study market patterns over long time horizons. No ESG data set goes back further than the 1990s—so analysts still cannot see how ESG factors relate to stock performance through a wide range of market conditions. Still, it is helpful if an ESG source has at least ten years of history and if it has made few or no changes to its methodology during this time.
    • Works well when combined with other data sets. Many ESG data users purchase more than one type of data. They extract value from combining these data sets to examine different aspects of a company’s sustainability performance. It is important to pick data sets that have enough identifying information (e.g., ticker codes, ISINs, name variations) that they can be combined. It helps too, if it is easy to pull data from a data provider’s site or application programming interface (API).

These investors will demand ESG data sets that give them marketing differentiation, ways to reduce risk, and opportunities to generate alpha. They are likely to use several data sets and combine them in a proprietary way, as they seek to make their understanding of ESG data part of their competitive advantage in the investment marketplace.

CSRHub ESG Business Intelligence

For more information on accessing ESG ratings via the CSRHub ESG Business Intelligence data feed, please visit the Open:FactSet Marketplace.

 

 

Bahar.GidwaniBahar 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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Does Materiality Matter?

[fa icon="calendar'] Feb 27, 2013 9:00:53 AM / by Bahar Gidwani

By Bahar Gidwani

Our friends at Agrion organized a Sustainability Summit last week.  About 250 people gold w captiongathered in New York to discuss various aspects of corporate social responsibility (CSR) and sustainability practice.  I had the opportunity to lead an all-star panel on materiality in sustainability reporting.  (Our panel included speakers from NASDAQ, Bloomberg, Rockefeller, and the CFA Institute.)

When we met ahead of the meeting, our group expressed a collective fear that we’d put our audience to sleep!  Materiality can be a pretty technical subject.  Here’s a quick definition of the word, in case you need it: Materiality is a measure of the estimated effect that the presence or absence of an item of information may have on the accuracy or validity of a statement.

We discovered that our panel of experts disagreed about exactly how materiality should be used in sustainability reporting.  One camp felt that sustainability reporting should be centered around a legal/regulatory view of materiality.  This perspective was well expressed in a recent SASB/Harvard article:

“…the courts and the SEC have generally defined information sufficiently “material” to require reporting as information that would be useful to “reasonable” investors considering a “total mix” of information in their decision making…the SEC has an obligation to require sustainability disclosure if a substantial portion of the investment community considers this information material…”

The other group felt that sustainability reporting should focus on what matters to a company’s stakeholder groups.  A recent CSR report from Electrolux put forth this view:

“In the context of sustainability, materiality relates to identifying the issues most relevant to conducting business responsibly and well. These issues can either potentially affect our performance, or the development of our business.”

Our audience initially agreed with the second (stakeholder) view.  After hearing the arguments in favor of the legal/regulatory view, almost the whole audience changed its opinion to agree that both perspectives should be considered, when doing sustainability reporting.

Although our panelists disagreed initially on this definition issue, they agreed on many other points.  For instance they all felt:

  • More companies are releasing more data, and some of it is becoming more material.  But we still get a lot of lousy data and smaller companies lag behind.

  • Stakeholders have different views of what data should be provided and whether or not it is sufficiently material.

  •  It would be great if we could consolidate all the competing materiality standards into a single set, but this is unlikely to happen.

We spent a lot of time on the question of standards.  It was obvious that our audience (mostly corporate sustainability managers) felt strongly that the standards environment was confusing and counterproductive.  Most of the audience had a favorable view of the work that has been done by the GRI (Global Reporting Initiative) and there was a lot of enthusiasm for the ISO26000 framework.  Fewer people knew about SASB’s initiative and those who did expressed concern that it would distract from the standards that were already known and in place.

I resisted dropping the Rodney King line (“Why can’t we all get along”) and instead appealed to our audience to be aware of and actively participate in the standards-setting process.  Our panelists offered similar closing remarks and reminded the audience that materiality discussions should lead to better understanding of the business opportunities (and risks) that come from sustainability reporting.


Bahar Gidwani is a Cofounder and CEO of CSRHub. Formerly, he was the CEO of New York-based Index Stock Imagery, Inc, from 1991 through its sale in 2006. He has built and run large technology-based businesses and has experience building a multi-million visitor Web site. Bahar holds a CFA, was a partner at Kidder, Peabody & Co., and worked at McKinsey & Co. Bahar has consulted to both large companies such as Citibank, GE, and Acxiom and a number of smaller software and Web-based companies. He has an MBA (Baker Scholar) from Harvard Business School and a BS in Astronomy and Physics (magna cum laude) from Amherst College. Bahar races sailboats, plays competitive bridge, and is based in New York City.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on nearly 7,000 companies from 135 industries in 82 countries. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.


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