“I find that when you open the door toward openness and transparency, a lot of people will follow you through.” Kirsten Gillibrand

At the risk of being a bit repetitive in these posts, this week I continue the theme discussed last week and a number of others; that of sustainability.  The catalyst for my thinking was a LinkedIn article I came across which addresses the proverbial elephant lingering somewhere about the room.  It is all very well to have good intentions about being sustainable and in good conscience go about doing the right thing, but how can we be sure that our actions have a positive contribution?  The rise of ESG is to be welcomed, even if makes us stop and think about the implications of a decision and its impact on society or the environment. 

The lingering concern, however, has been the extent to which we purely pay lip service to the idea or worse, that it simply becomes a box ticking exercise to show compliance with the many codes that have been formed.  This issue is exacerbated by multiple data sources, each with their own focus on the different components of environmental, social or governance factors.  I am reminded of analysis done by my previous firm which showed low cross-sectional correlations across data providers.[i]   Individually these data providers no doubt have robust and focused processes to address the ESG challenge, but if they are each pursuing their own agenda is that to the detriment of the collective effort?

The article to which I referred earlier and posted in LinkedIn is entitled ‘How to measure a company’s real impact’ but Sir Ronald Cohen and George Serafeim.[ii]  The piece draws on the work of the Impact-Weighted Accounts Initiative (IWAI) of Harvard Business School, which assesses the environmental impact of some 1,800 companies.  When put into monetary terms the impact of this assessment is stark.  According to their calculations “for certain industries, including airlines, paper and forest products, electric utilities, construction materials, containers and packaging, almost all firms would see more than a quarter of their EBITDA eliminated.”  Interesting this is not a one-way street and the paper talks about how companies are able to create positive impacts, though like the negative impacts referenced above these would not be reflected currently in the financial performance.  The example they cite is that of Intel which created $3.6 billion of positive impact in 2018 by creating jobs in areas of high unemployment.

The piece goes on to talk about a strong correlation between negative environmental impacts and lower stocks market valuations in certain industries, which suggests that the broad theme of ESG is taking hold where there is transparency of information about a company or sector’s impact.  The concern, however, is that without the information we are dealing with generalities – we may perceive a business to rank poorly on ESG measures, but with transparency to their actual financial impact we would be better equipped to make a more robust decision. 

This approach is, in my mind, a welcome step forward.   There is significant investor interest in ESG and it is essential that we develop tools that can provide the transparency around impact to inform the materiality of an investment and also deter ‘green-washing’.  No doubt the process employed by IWAI will have its critics and detractors or alternative providers offering something similar, but not quite the same – leading to ambiguity as to the “best” solution.  But if the direction of travel is to put some tangible financials around impact then we should be in a better place to determine the sustainability of our decisions.

[i] https://www.ssga.com/library-content/products/esg/esg-data-challenge.pdf

[ii] Harvard Business Review, HBR.org, September 03, 2020 “How to measure a company’s real impact”.

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