Gordon Tveito-Duncan, Head of ESG Technology at GaiaLens, considers how asset owners can assess asset managers’ portfolios for social performance despite data deficiencies.
There is no doubt that scoring and benchmarking the social performance of the companies in which asset owners investing is the most challenging of the three pillars of ESG from a reporting perspective right now.
Yet increasingly, asset owners are not only setting greenhouse gas (GHG) emissions targets for their mandates but are now articulating social values-related goals which they are mandating asset managers to address.
Some of the larger US charitable foundations have already declared deep commitments to targets related to the UN Sustainable Development Goals, such as the eradication of poverty and promotion of equality. Others, including many of the Australian superannuation funds, have declared modern slavery elimination targets which they demand asset managers to report on.
Governance and environmental performance reporting are relatively mature and hard numbers are widely collected, reported and increasingly required by regulation. For example, the recent landmark climate proposal by the US Securities and Exchange Commission (SEC) establishes a disclosure framework based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework and the Greenhouse Gas Protocol.
The SEC requires disclosure of climate-related risks; climate-related effects on strategy, business model, and outlook; board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks; plans for transition; financial statement metrics related to climate; GHG emissions; and climate targets and goals. It establishes a safe harbour for Scope 3 disclosures and an attestation requirement for large companies’ Scope 1 and 2 disclosures.
Scanning across to the Financial Reporting Council’s UK Stewardship Code, the 2020 Code represents a mature governance regime for UK-listed businesses. It has its origins in 1992’s Cadbury report and code, which covers the financial aspects of corporate governance.
Yet the progress made on environmental and climate risk-related performance reporting by asset owners and asset managers in the last few years and financial governance reporting regimes before that, now leaves social performance reporting playing catch up.
Both social and deeper governance reporting is now rising up many asset owners’ agendas this year. GaiaLens’ own January 2022 study of the ESG integration plans of the largest asset owners in the US and Western Europe uncovered that both social and governance performance reporting will become ‘more significant in our investment decisions’ before the end of 2022 for 46% of chief investment officers and heads of sustainability at these leading asset owners.
Scoring qualitative social features is harder
But what will that improved social reporting look like in the next year or two, as asset owners and the managers of their mandates look to develop better performance reporting capabilities for the companies whose stock they are holding?
One of the key problems of social pillar reporting is that a good many of the features which make up social performance scores are intrinsically qualitative. Others are sector specific. Furthermore, most are not yet required by regulation or legislation at state or national level.
One approach is to pull together data from third-party employee review sites to create social pillar ratings against employee satisfaction-linked themes for example. However, even with third-party data extraction and analysis, coverage is often sparse. The lack of data makes accurate scoring hard and benchmarking of results against a company’s peer group even harder today. Some other social pillar factors which fall into a similar category of ‘hard-to-measure and even harder to encourage disclosure of’ are:
- Diversity & Inclusion
- Work Life Balance
- Company Culture
- Employee Opinion of Senior Management/CEO
All of the above must rely in large part on a mix of third-party review sites. But how, for example, can public companies accurately collect data employee satisfaction? And if they do so, are they likely to go public on any new negative employee satisfaction findings unless they are specifically required to do so by a regulator or legislation? Pretty quickly you realise you cannot rely on self-reporting alone for a reliable score on this feature. Far better to go to company review sites like Comparably or Indeed.
Things get even harder to score and benchmark when you get into what we at GaiaLens call the ‘communities’ stakeholder group and its impact within the social pillar. This is arguably what, pre-ESG, corporations might have put under the banner of corporate social responsibility. For us today this includes areas such as:
- Human Rights
- Corporate Citizenship & Philanthropy
- Public Health
For asset owners and managers, it’s clearly easier to demand employee turnover numbers from companies you are investing in. But despite the fact that this is such an important indicator of future success for any manpower-intensive or knowledge-led business, there is still no external reporting requirement which demands release of this information. And it tends to be only self-reported when companies think they are outperforming their peers and want to use the resulting positive publicity to attract more talent.
The other key issue about social pillar reporting for asset owners is that most asset managers have different methods of reporting social performance of their fund selections and portfolios. That lack of standardisation of social reporting by asset managers creates a blizzard of data and unbenchmark-able scores which reach the asset owner. It’s worth considering that the average pension fund has up to 180 asset managers working for them, all reporting in very different ways, perhaps putting different emphasis on what and how social performance of public companies is measured.
Analysis needs to go deep and wide
One way of cutting through all this is for a third-party ESG specialist to penetrate into asset managers’ portfolios to holdings level, uncovering which stocks with pre-analysed poor E,S and/or G performance a specific asset owner has deepest exposure to across all mandates. Where those ESG laggard public companies have poor performance in areas which run in direct contravention of an asset owners’ social values and goals, it becomes possible to screen those specific stocks out across the board.
A promising way to tackle much of the social pillar’s dependence on qualitative data is to aggregate and cross correlate as much data from multiple third-party sources. It’s important to go beyond the company’s own reports to unstructured data sources such as news media reports linked to the company in question, to provide an early warning signal of future violations. This can include specialist NGOs focusing on uncovering abuses in niche areas such as modern slavery and other human rights violations.
Being able to access, cross-correlate and score these data sources iteratively helps build more and more richly-populated data pools which, with powerful machine learning and algorithmic analysis, feeds through to increasingly robust scoring and benchmarking.
As the data builds, it becomes possible to see the areas of strong focus for a company, in other words what is it trying to project about itself, such as ‘we are a safe place to work’, or we offer a ‘great place to further your career’ etc. And if you add reliable third-party data to the mix it becomes possible to detect how many times a company is breaching its own corporate values and goals. It becomes possible to use this approach to not only flush out greenwashing but ‘ESG washing’ across all three pillars and within the features which make up each of those pillars.
Finally, many asset owners at this stage are looking for reliable routes to separate the wheat from the chaff from a sustainable investment perspective. It may be simply about pinpointing the bottom 10 per cent of listed companies that asset owners have major exposure to, so that asset owners can begin to scrutinise asset managers holding these poor performers in their portfolios.
Meanwhile, the larger asset owners are beginning to call the shots – demanding that any ESG poor performers are flagged and excluded from portfolios more rapidly and consistently. They may go further still by demanding that their asset managers offer online dashboards views of the poor performers, even offering a facility to drill down into the detail of a negative news report, court ruling or employment tribunal which lies behind that poor ESG score or red flag.
Gordon Tveito-Duncan, Head of ESG Technology at GaiaLens, considers how asset owners can assess asset managers’ portfolios for social performance despite data deficiencies.
There is no doubt that scoring and benchmarking the social performance of the companies in which asset owners investing is the most challenging of the three pillars of ESG from a reporting perspective right now.
Yet increasingly, asset owners are not only setting greenhouse gas (GHG) emissions targets for their mandates but are now articulating social values-related goals which they are mandating asset managers to address.
Some of the larger US charitable foundations have already declared deep commitments to targets related to the UN Sustainable Development Goals, such as the eradication of poverty and promotion of equality. Others, including many of the Australian superannuation funds, have declared modern slavery elimination targets which they demand asset managers to report on.
Governance and environmental performance reporting are relatively mature and hard numbers are widely collected, reported and increasingly required by regulation. For example, the recent landmark climate proposal by the US Securities and Exchange Commission (SEC) establishes a disclosure framework based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework and the Greenhouse Gas Protocol.
The SEC requires disclosure of climate-related risks; climate-related effects on strategy, business model, and outlook; board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks; plans for transition; financial statement metrics related to climate; GHG emissions; and climate targets and goals. It establishes a safe harbour for Scope 3 disclosures and an attestation requirement for large companies’ Scope 1 and 2 disclosures.
Scanning across to the Financial Reporting Council’s UK Stewardship Code, the 2020 Code represents a mature governance regime for UK-listed businesses. It has its origins in 1992’s Cadbury report and code, which covers the financial aspects of corporate governance.
Yet the progress made on environmental and climate risk-related performance reporting by asset owners and asset managers in the last few years and financial governance reporting regimes before that, now leaves social performance reporting playing catch up.
Both social and deeper governance reporting is now rising up many asset owners’ agendas this year. GaiaLens’ own January 2022 study of the ESG integration plans of the largest asset owners in the US and Western Europe uncovered that both social and governance performance reporting will become ‘more significant in our investment decisions’ before the end of 2022 for 46% of chief investment officers and heads of sustainability at these leading asset owners.
Scoring qualitative social features is harder
But what will that improved social reporting look like in the next year or two, as asset owners and the managers of their mandates look to develop better performance reporting capabilities for the companies whose stock they are holding?
One of the key problems of social pillar reporting is that a good many of the features which make up social performance scores are intrinsically qualitative. Others are sector specific. Furthermore, most are not yet required by regulation or legislation at state or national level.
One approach is to pull together data from third-party employee review sites to create social pillar ratings against employee satisfaction-linked themes for example. However, even with third-party data extraction and analysis, coverage is often sparse. The lack of data makes accurate scoring hard and benchmarking of results against a company’s peer group even harder today. Some other social pillar factors which fall into a similar category of ‘hard-to-measure and even harder to encourage disclosure of’ are:
All of the above must rely in large part on a mix of third-party review sites. But how, for example, can public companies accurately collect data employee satisfaction? And if they do so, are they likely to go public on any new negative employee satisfaction findings unless they are specifically required to do so by a regulator or legislation? Pretty quickly you realise you cannot rely on self-reporting alone for a reliable score on this feature. Far better to go to company review sites like Comparably or Indeed.
Things get even harder to score and benchmark when you get into what we at GaiaLens call the ‘communities’ stakeholder group and its impact within the social pillar. This is arguably what, pre-ESG, corporations might have put under the banner of corporate social responsibility. For us today this includes areas such as:
For asset owners and managers, it’s clearly easier to demand employee turnover numbers from companies you are investing in. But despite the fact that this is such an important indicator of future success for any manpower-intensive or knowledge-led business, there is still no external reporting requirement which demands release of this information. And it tends to be only self-reported when companies think they are outperforming their peers and want to use the resulting positive publicity to attract more talent.
The other key issue about social pillar reporting for asset owners is that most asset managers have different methods of reporting social performance of their fund selections and portfolios. That lack of standardisation of social reporting by asset managers creates a blizzard of data and unbenchmark-able scores which reach the asset owner. It’s worth considering that the average pension fund has up to 180 asset managers working for them, all reporting in very different ways, perhaps putting different emphasis on what and how social performance of public companies is measured.
Analysis needs to go deep and wide
One way of cutting through all this is for a third-party ESG specialist to penetrate into asset managers’ portfolios to holdings level, uncovering which stocks with pre-analysed poor E,S and/or G performance a specific asset owner has deepest exposure to across all mandates. Where those ESG laggard public companies have poor performance in areas which run in direct contravention of an asset owners’ social values and goals, it becomes possible to screen those specific stocks out across the board.
A promising way to tackle much of the social pillar’s dependence on qualitative data is to aggregate and cross correlate as much data from multiple third-party sources. It’s important to go beyond the company’s own reports to unstructured data sources such as news media reports linked to the company in question, to provide an early warning signal of future violations. This can include specialist NGOs focusing on uncovering abuses in niche areas such as modern slavery and other human rights violations.
Being able to access, cross-correlate and score these data sources iteratively helps build more and more richly-populated data pools which, with powerful machine learning and algorithmic analysis, feeds through to increasingly robust scoring and benchmarking.
As the data builds, it becomes possible to see the areas of strong focus for a company, in other words what is it trying to project about itself, such as ‘we are a safe place to work’, or we offer a ‘great place to further your career’ etc. And if you add reliable third-party data to the mix it becomes possible to detect how many times a company is breaching its own corporate values and goals. It becomes possible to use this approach to not only flush out greenwashing but ‘ESG washing’ across all three pillars and within the features which make up each of those pillars.
Finally, many asset owners at this stage are looking for reliable routes to separate the wheat from the chaff from a sustainable investment perspective. It may be simply about pinpointing the bottom 10 per cent of listed companies that asset owners have major exposure to, so that asset owners can begin to scrutinise asset managers holding these poor performers in their portfolios.
Meanwhile, the larger asset owners are beginning to call the shots – demanding that any ESG poor performers are flagged and excluded from portfolios more rapidly and consistently. They may go further still by demanding that their asset managers offer online dashboards views of the poor performers, even offering a facility to drill down into the detail of a negative news report, court ruling or employment tribunal which lies behind that poor ESG score or red flag.
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