Local initiatives create new opportunities for international investors
One day – sooner than later – we will have standardized sustainability reports and ESG metrics to aid ESG investors. These tools will allow investors to compare companies on important sustainability criteria. Moreover, investors will also be able to determine which companies share their personal values more easily.
Alas, we are not there yet. As such, conscientious ESG investors need to do some extra legwork in the vetting process. The overarching question that needs to be answered is this: How sustainable and socially responsible are companies who claim to abide by ESG guidelines?
It’s all about accountability. Are these companies truly who they say they are?
As someone who has been embedded in the sustainability and socially responsible investing world for several years, I think there are five key questions that potential ESG investors can ask when vetting companies regarding their adherence to ESG guidelines.
1) Does the company publish a corporate sustainability report on a regular basis?
If the answer is no, you can stop your vetting process for that company on the spot. If a company isn’t willing, or able, to put together a sustainability report, it’s very likely their commitment to ESG guidelines is less than robust. At this point in time, companies produce sustainability reports voluntarily. However, more and more companies are producing these reports, usually on an annual basis. Currently, if a company hasn’t even taken the time to develop a sustainability report you can rest assured that any ESG commitment they’ve made is superficial at best.
How sustainable and socially responsible are companies who claim to abide by ESG guidelines?
2) Does the company’s definition of ESG match yours?
Some companies have very general — and sometimes ambiguous — definitions of ESG. Before diving too deeply into what a company says they are doing on the ESG front, look for how they define ESG and determine if it matches your definition. If a company has a sustainability report, you can probably find the company’s definition early on in there. Another place to look is the CEO letter in the annual report.
3) Do the company’s ESG priorities match your priorities?
The vast majority of ESG investors are doing so because they want to align their investments with their values. As such, potential ESG investors should look to see if a given company has truly inserted ESG values into its core activities. Look at the “true cost” of doing business for companies you’re evaluating — consider all stakeholders, not just the company’s shareholders, and measure the societal and environmental impact of a company’s operations, including negative impacts such as air and water pollution, excessive carbon dioxide output, unfair or illegal labor practices, and more.
4) Is the company “greenwashing” when it comes to its ESG projects?
When it comes to ESG investing, many investors worry about falling victim to “greenwashing.” According to a recent study, nearly half (44%) of investors list greenwashing as their biggest concern when considering ESG investments. Greenwashing definitions can vary slightly but basically it occurs when companies use PR, advertising, and marketing tactics to make investors and other stakeholders believe that they are more environmentally friendly and socially conscious than they really are. These companies may have an internal initiative or two that make their operations “less bad,” but they do little in terms of “active good” when it comes to minimizing their overall negative environmental and social impact. Their primary driver is to capitalize on the popular sustainability trend. Look for genuine, active, good initiatives.
ESG investing is in its embryonic stage. Uniform standards and metrics are lacking. As such, navigating the ESG landscape can be tricky.
5) What metrics and standards are the company using to determine the impact of its ESG initiatives?
The Securities and Exchange Commission (SEC) is gradually moving in the direction of requiring standardized reporting when it comes to ESG metrics. Congress has also taken steps toward requiring reporting rules in the ESG area.
That said, for now, we are left with a hodgepodge of metrics developed by nonprofits and independent groups. These include the Sustainability Accounting Standards Board (SASB), and the Global Reporting Initiative (GRI), among others. ESG investors can look at these standards and metrics and determine how useful they are based on the fit with their personal ESG values and priorities.
Traditional quantitative metrics used to evaluate a company’s financial performance are still valuable in the world of ESG investing. ESG investors are certainly interested in financial numbers. They are also interested in social and environmental initiatives that can be evaluated with quantitative metrics.
However, to feel confident that your ESG investment is having the type of social and environmental impact you’re after, I believe you should develop a personalized qualitative analysis approach – in addition to any quantitative metrics a given investor finds useful – to use when considering potential ESG investments.
With a well-considered approach to vetting, ESG investors can avoid obstacles like greenwashing and greatly enhance the chances their investments will have a positive impact on the world.
In today’s rapidly changing world of ESG investing, the qualitative judgment of what a company is doing needs to be the foundation of ESG investment analysis. Qualitative research seeks to answer “why” and “how” questions by reviewing a wide variety of publicly available content from traditional and social media sources. That could include everything from blogs to third party company reviews, to required regulatory disclosures. Eventually, you will be able to create your own narrative for qualitatively evaluating the performance of potential and current ESG investments.
ESG investing is in its embryonic stage. Uniform standards and metrics are lacking. As such, navigating the ESG landscape can be tricky. But with a well-considered approach to vetting, ESG investors can avoid obstacles like greenwashing and greatly enhance the chances their investments will have a positive impact on the world.
Regina "Gina" Kline
Founder & Managing Partner, Enable Ventures
October 27 - 12:00 PM EST
Founder & CEO, Acumen
November 3 - 12:00 PM EST
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