An economy is a system of production, consumption, and exchange activities that ultimately determines how resources are allocated. All the goods and services produced are intended to fulfill the needs of participants in that economy. But what if those needs change substantially? What if the demand curve for a key commodity shifts to the right dramatically? What if, at the same time, the supply curve shifts to the left? It means that the value of that commodity will increase enormously.

And so, here we are in the digital age, where information and content are wildly abundant and the ability to grab and hold the attention of individuals is exceedingly challenging. Here we are in a place where platforms, media outlets, and businesses compete for a finite amount of attention. Attention is now the scarcest commodity. Welcome to the “attention economy.”

This term was coined by psychologist, economist, and Nobel Laureate Herbert A. Simon, who argued that “a wealth of information creates a poverty of attention.” As noted in the Berkeley Economic Review, the term implies that there is a “bottleneck of human thought” that limits our capacity to absorb and act on information. It seems we may never find equilibrium again.

There are methods one can use to sort through the noise. With regard to investing, one of the most obvious ways to is to focus on analyzing the long-term material environmental, social, and governance (ESG) factors that will ultimately affect the profitability of an enterprise. In the attention economy, the pull for investors to switch between various sources of information and data, to rely on sound bites, algorithms, and noise pollution from false ideologies, and to make rapid-fire decisions without attending to the true risks and opportunities can have devastating effect. We must pay attention to what we are paying attention to. So, to support our cognitive processes and selectively allocate our scarce resources, a framework is in order. The systematic analysis of material ESG factors in an investment process offers precisely such a framework. AI, machine learning and quantum computing will all help in their time (see Pathstone’s report Quantum Impact for more), but investors do not need to wait.

Attention is now the scarcest commodity. Welcome to the “attention economy.”

So for the balance of this article, I’ll refer to a note written with John Wilson of Calvert Research for a report we did a few years ago with Blackrock and Ceres. In “21st Century Engagement,” we offer a framework for incorporating ESG considerations into corporate interactions, paying attention to the key questions to ask by sector, given the role of sector analysis in providing predictive insight into investment decisions. We attend to what is truly “material” such that a reasonable investor needs to absolutely consider it in the context of making a buy or sell decision. Without attempting to be all-inclusive, we turn our attention to some sectors and specific questions that can be posed by investors and analysts to build a more robust and comprehensive understanding of risk and value creation.

PAY ATTENTION: KEY QUESTIONS BY SECTOR

OIL, GAS AND MINING

1. Has the company modeled scenarios that include low-carbon public policies and impacts on demand and supply? How does the company evaluate the risks of assets becoming stranded because of potential climate change regulation, water risks, or other factors affecting demand and price? How has the company’s evaluation of new exploration activities changed in light of this analysis?
2. Given the uncertainties surrounding the company’s long-term investments, how does executive pay incentivize an appropriate balance of short-term performance and long-term strategic orientation?
3. How does the company identify the risk of local community opposition? How does the company account for the costs should such opposition occur? Which operations are located in regions where they may face these risks and how are you addressing them?
4. What has the company learned from the numerous safety and emissions events in the extractives sector over the last several years, and how have you enhanced safety processes and governance in response?
5. What emerging forms of corruption concern you? How do you identify new forms of corruption and adapt your compliance training and practices? How are managers incentivized to prevent corruption?

A wealth of information creates a poverty of attention.

BANKING AND FINANCE

1. What analyses has the bank undertaken to assess its broad social and economic impact in the communities in which it operates? Which lines of business are most affected by these assessments? What is the process for incorporating these concerns into financing decisions?
2. How does the bank ensure that customers always receive services that are appropriate for their situations, and understand the nature of the risks they are taking?
3. What are the key factors influencing customers’, regulators’ and business partners’ trust in the bank and how is the bank managing these factors?
4. What are the bank’s policies on the environmental impacts of its lending activities?
5. How does the company factor in long-term social and environmental trends, especially rising climate change, into its enterprise risk management systems? What is the process of board and management oversight of this?
6. Given the breadth of the bank’s/financial institution’s global business lines, how does its governance structure address concerns about complexity risk?
7. How does executive compensation create incentives for long-term performance at a reasonable level of risk? How do the company’s compensation policies for ordinary employees create incentives for appropriate risk-taking?

INSURANCE

1. How does the company factor in climate change into its enterprise risk management systems, actuarial analyses, underwriting, or investment strategies? What is the process of board and management oversight of these?
2. How is the company minimizing the risk of the misuse of “big data” when using large data sets to better assess, price or create products?
3. Given that the insurance sector has more detailed and personal information on individuals or customers than most industries, how does the company assess the quality and adaptability of its cybersecurity measures? How often are your plans for security refreshed or re-evaluated?
4. How has the company developed strategies to create future products or coverage to attract a wider range of customers spanning a broader socio-economic spectrum? What are the company’s long-term plans for growing market share in an environment where major risks continue to put at risk the affordability and availability of insurance products?
5. How does the company ensure timeliness and ease of claim processing, as well as transparency of policies? How do the company’s products incentivize healthy, safe, and/or environmentally conscious behavior? (e.g., promote energy efficiency and low carbon technology?)

INFORMATION TECHNOLOGY

1. How does the company analyze and mitigate concerns about cybersecurity? What policies are in place to protect the reasonable privacy rights of its customers and business partners? How does the company think about balancing privacy rights with reasonable expectations of transparency?
2. How has the company assessed water-related risks to operations and in the supply chain?
3. How does the company assess the potential physical impacts of climate change to its infrastructure? How is the company addressing this?
4. Does the company source any raw materials from conflict-affected areas (or does the company trace its supply chain back to conflict-affected areas)? How do you assess and manage the risk of supply chain disruptions from these areas?
5. How does the company measure the productivity of its human and intellectual capital? How does the company assess the diversity of its work force? What steps is the company taking to improve diversity?
6. How is the company addressing shortages in the science, technology, engineering, and math (STEM)-trained workforce?

ELECTRIC UTILITIES

1. Has the company assessed the physical risks to its infrastructure posed by extreme weather events and other climate impacts? How does the company assess emerging water-related risk? How does this analysis impact the company’s investments in systems upgrades?
2. How is the company positioned relative to public policies designed to ensure a reliable and affordable energy supply, possibly at the expense of profitability?
3. How does the company analyze and mitigate security threats, including cybersecurity and potential threats to physical assets, including substations and nuclear plants?
4. Is the company adapting its business model in response to increased demand-side efforts to mitigate climate change, such as energy efficiency and plug-in hybrids? How is the company addressing the growth of distributed renewable energy generation?
5. How is the company affected by the secular decline in renewable energy prices, and related advancements in distributed energy?

APPAREL AND RETAIL

1. What emerging or potential natural resource constraints concern you the most? How does the company evaluate its water-related risks? How are you adapting your supply chain management systems in response?
2. What steps have you taken to incorporate principles of sustainable product design?
3. How is the company positioned with regard to taking advantage of increased buying power in middle-income countries? What impact do rising wages have on the company’s procurement practices?
4. How does the company evaluate its risks of high-profile safety or other negative labor-related events in its supply chain? How is the company evolving its procurement practices in response?
5. With regard to its own employees, what is the company’s strategy for maximizing the productivity and motivation of its workforce, particularly customer-facing employees?

TRANSPORT

1. How are you modeling the impact of potential climate change regulation on market demand or pricing? How does the company’s long-term business strategy position the company for uncertainties related to future climate policy? How do rising energy prices affect your manufacturing and distribution strategies?
2. What emerging or potential natural resource constraints concern you the most? How are you adapting your supply chain management systems in response?
3. How is the company positioned to supply mobility in the emerging megacities of the developing world?
4. How does your governance structure support a culture of safety within the firm? How are executives incentivized to ensure that safety remains a priority throughout the economic cycle?

FOOD AND BEVERAGE

1. How does the company assess water-related risks in its supply chain? How is the company assessing its need to adapt to the physical impacts of climate change? More generally, what is the company’s assessment of the impact of growing relative scarcity of agricultural commodities on its business?
2. How has the company assessed the impact of potential future climate change mitigation policies on its supply chain, including transportation costs? How is the company addressing the physical impacts of climate change on its supply chain?
3. How does the company assess the risk associated with increasing relative scarcity of agricultural land and pressures on biodiversity?
4. What is the impact of rising incomes in the developing world on the company’s business, from both a supply and a demand perspective?
5. With regard to its own employees, what is the company’s strategy for maximizing the productivity and motivation of its workforce, particularly customer facing employees? How does the company manage reputational risks associated with a possible high profile labor event (such as a safety failure or discovery of forced labor) in its supply chain?
6. How does the company assess the impact to its business of rising concerns in the United States about nutrition and health? How is the company managing the potential impacts of these shifting attitudes?

HEALTHCARE AND PHARMACEUTICALS

1. What are the key factors influencing the trustworthiness of the company from the perspective of patients, healthcare providers, and regulators? How is the company managing these factors?
2. What steps has the company taken to ensure that its products are marketed in an ethical way? How do you assess whether these steps are effective? What bribery controls are in place?
3. How will changing demographics, including the aging of populations in developed countries and rising incomes in developing countries, affect product demand? How is the company positioned for these changes?
4. How does the company’s executive compensation policy create incentives for excellence in patient outcomes?
5. How is the company making efforts to improve access to medicines? What are the strategic objectives of these efforts and how do you measure their effectiveness?
6. With regard to its own employees, what is the company’s strategy for maximizing the productivity and motivation of its workforce, particularly customer facing employees?