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Exploring Environmental, Social, and Governance Metrics for Responsible Investin.

Responsible investing and corporate social responsibility (CSR) are hardly new concepts to the investing world--they've been around since the 1980s at least. Some trace the roots of the interest in social responsibility all the way back to Howard R. Bowen's 1953 book Social Responsibilities of the Businessman (New York: Harper & Brothers), with a new edition published in 2013 by the University of Iowa Press. People have been interested in investing in companies that align with their personal values for decades. They want to support companies with robust diversity and inclusion programs. They buy shares in companies that care about the environment and support civic causes. They shy away from tobacco and armaments companies.

It goes beyond the investing community. People avoid buying products manufactured by companies with whose policies they disagree. The Ethical Consumer website has a list of companies it either advocates boycotting, such as Amazon, or that have boycotts called against them by another entity. PETA calls for a boycott of Air France and Fortnum and Mason; the Methodist Tax Justice Network for Cadbury; GMO-Free USA for Kellogg's; Baby Milk Action for Nestle; and (closer to home) the Cost of Knowledge for Elsevier. It's actually a rather short list. A simple search for boycott companies adds many more names along with opinion pieces on the efficacy, or lack of it, of boycotting.

Employees are also making their opinions known. Due to opposition from its workforce, for example, Google decided against bidding on the JEDI (Joint Enterprise Defense Infrastructure) defense contract that involved artificial intelligence (AI) and cloud computing. Employees also disliked the Maven project, which used Google-developed AI in relation to drone footage. Its work in China, possibly on a search engine known as the Dragonfly project, is under scrutiny by Google employees who are uncomfortable with the company's involvement with government censorship.

BACKGROUND OF SUSTAINABILITY IN INVESTING

An acronym floating around the business world, ESG, stands for environmental, social, and governance. It's gaining traction since it was first introduced around 2005. You'll see ESG associated with ratings and rankings. It is part of a larger concern--not restricted to investing--about sustainability. As Georg Kell notes in a July 11, 2018, Forbes article ("The Remarkable Rise of ESG," forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg), evaluating companies on sustainability issues goes substantially beyond traditional financial analysis, but still "may have financial relevance."

Kell credits former U.N. Secretary General Kofi Annan with pushing financial institutions to integrate environmental, social, and governance issues into the capital markets. The resulting Principles for Responsible Investment (unpri.org) is a global initiative with more than 1,600 members. After initial skepticism, it's now evident that sustainable companies tend to outperform those that are less sustainable. Responsible investing, thinks Kell, is not a fad but an indication of how both markets and society are changing.

According to Investopedia (investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp), the criteria for ESG are "a set of standards for a company's operations that socially conscious investors use to screen potential investments." Other terms used to describe ESG include sustainable investing, responsible investing, ethical investing, impact investing, and socially responsible investing. The decision about how well a company meets ESG criteria is subjective. It can also change precipitously. Just look at the difference in how people regarded Volkswagen before and after its emissions scandal.

SEARCHING ACRONYMS

News about ESG is readily available through every major business database. However, none have a consistent thesaurus term. Dow Jones Factiva comes closest, with an Industry (IN) code, iresinv, for Sustainable Investment and a subject (NS) code, ccsr, for Corporate Social Responsibility. EBSCO's Business Source Complete uses Sustainable Development Reporting, Social Responsibility of Business, and Corporate Governance but with no discernable pattern and sometimes with a different controlled vocabulary term altogether.

Simply searching ESG leads to its own set of problems. Acronyms are notorious for having multiple meanings. In this case of ESG, there are some particularly egregious possibilities for misunderstanding, starting with the acronym's use as a ticker symbol. ESG is the ticker symbol for FlexShares STOXX US ESG Impact Index Fund, which is an exchange-traded fund (ETF) traded on the NASDAQ. This isn't the only fund to take advantage of investor interest in sustainability. ESGV is Vanguard ESG U.S. Stock ETF, SUSA is iShares MSCI USA ESG Select ETF, VSGX is Vanguard ESG International Stock ETF, JH-JAX is John Hancock ESG Large Cap Core Fund Class A, ESGD is iShares MSCI EAFE ESG Optimized ETF, ESDE is iShare ESG MSCI EAFE ETF, and GTFPX is Goldman Sachs International Equity ESG Fund Class P. There may well be others, but they didn't choose to put the acronym into their name.

FINDING ESG RANKINGS

Given the number of funds providing investors with the opportunity to invest in ESG companies without having to research individual companies' ESG ratings, it's no surprise that Morningstar got involved. It introduced Sustainability Ratings in August 2016. Morningstar rates not just the funds that explicitly hold highly rated ESG companies but also all the 20,000 funds it covers. The ratings are based on company-level ESG scores developed by Sustainalytics (sustainalytics.com), an independent ESG ratings company based in Amsterdam, and ESG controversies. Instead of the familiar star ratings, the Sustainability Ratings show globe ratings, from one globe for those at the bottom of the scale to five globes for highly rated companies. The ratings are issued monthly.

In November 2018, Morningstar enhanced its Sustainability Ratings to base its ratings on a full year of fund portfolio holdings rather than limiting it to 1 month and made some changes in its peer groupings definition. Note, too, that Sustainability Ratings are only for mutual funds, not individual companies.

Morningstar isn't the only company to add ESG information to its databases. Bloomberg has an ESG dashboard on its terminal. For specific companies, enter the ticker symbol, press the yellow Equity key, type FA ESG (FA stands for Financial Analysis), and press the green Go key. Bloomberg provides screening capabilities as well. Refinitiv's Datastream also includes ESG data, labeled as Thomson Reuters Asset4. In February 2019, Thomson Reuters published an overview of its ESG activities and methodologies (refinitiv.com/content/dam/marketing/en_us/documents/methodology/esg-scores-methodology.pdf). An early adopter, Dow Jones introduced its Sustainability Index in 1999.

Yahoo Finance (finance.yahoo.com) uses Sustainalytics for its ratings. Enter a ticker symbol, then click on Sustainability to see the total score and how it breaks down for the environment, social, and governance components. Yahoo Finance also provides interactive charts for overall historical ESG performance and separate charts for the three components with comparisons of the individual company to category averages. It also provides a significant controversy level on a scale of 1 (none) to 5 (severe). Google Finance (google.com/finance) does not include ESG information in its company summaries.

DEDICATED DATABASES

For researchers, several databases concentrating on ESG investments are available. Most prominent are MSCI, CRS Hub, and RepRisk. MSCI offers its MSCI-ESG Direct database that measures the ESG performance of corporations. It covers more than 5,000 companies in 50-plus global markets and provides more than 200 ESG indicators and some 2,000 ESG points. The database is by subscription only, but its blog posts that explore various investing issues is free (msci.com/research/esg-research). With MSCI-ESG Direct, you can analyze an individual company's ESG position, create a list of companies meeting various ESG risk criteria, and download research reports on ESG topics.

MSCI's methodology begins with a deep governance assessment that looks at ownership, its board of directors, compensation practices, and general corporate behavior. It then focuses on the most relevant ESG factors by industry, since risk factors will not be the same across industries. Manufacturing, for example, faces issues that financial services firms do not. The next step scores the key issues for exposure not just disclosure. The final ESG ratings range from AAA (Leader) to CCC (laggard).

The CSR Hub (crshub.com) database is much larger that SMCI's, with 18,000 rated companies from 141 countries and data of another 160,000. Its size presents significant challenges in trying to create transparent ratings and ranking. It claims 617 SCR/ESG data criteria (and the number seems to grow each time I look at the website). The advanced search box lets you search by 12 facets, including various geographic locations, several ratings, industry, and text. You can also apply Boolean logic to your terms. You can also browse by countries, industries, data sources, or alphabetically. I searched for Indiana companies and found that Cummins, Inc. was the top-rated, with Eli Lilly a close second.

CRS Hub provides four levels of data, starting with top-level ratings and rankings (which CSR Hub considers as separate). The next level of detail is for community, employees, environment, and governance. You can then drill down to 12 sub-categories. It aggregates rankings from a variety of sources, including Asset4, Dow Jones Sustainability Index, Glassdoor, MSCI, Newsweek, Thomson ESG Index, and the U.N. A full list, which numbers 500 sources, is at csrhub.com/CSR_data_source_ratings.

RepRisk (reprisk.com), a Swiss company, developed its database in response to a request from UBS 10 years ago for a list regarding risk factors for 100 companies. The database has now grown to 122,000 companies in 34 sectors and, as a due diligence database on ESG and business conduct (how it manages risks from human rights, labor, the environment, and corruption), is intended to be a risk-monitoring tool.

RepRisk combines text extraction and AI-based deduplication with human intelligence to create its due diligence toolbar. It publishes benchmarking briefs as well as company and portfolio monitoring research reports. Its research and metrics are updated daily. RepRisk classified ESG into 28 issues, which can be filtered based on the 10 UN Global Compact Principles. Additionally, RepRisk has 57 Topic Tags, which is what it calls the thematic "hot topics" it identifies on an ongoing basis. Here you find topics as widespread as Arctic drilling, drones, alcohol, monocultures, rare earths, predatory lending, tobacco, and water scarcity. Its 12 datasets, each with more than 10 years of historical data, include companies, countries, ESG issues, NGOs, campaigns, regions, and governmental bodies.

RepRisk and MSCI are available through WRDS (Wharton Research Data Services); CRS Hub offers a 50% discount for academic institutions.

FOLLOWER OF FASHION

Anyone who believes that ESG ratings, rankings, and investing is a fad is almost entirely wrong. ESG data is not part of a fad, not a fashion flash in the pan. It's here to stay and is a logical outgrowth of earlier interest in finding socially responsible companies. If anything, the interest in corporate responsibility surrounding the environment, social issues, and governance will intensify.

Terminology may change, but online searchers know how to keep up with those changes and incorporate them into search strategies. I speculated, 25 years ago ("Finding Socially Responsible Companies," DATABASE, October/November 1994, pp. 86-89) that a major company would create a rating system for social responsibility that would be included in their databases. I was wrong on the companies I chose to mention--at least one no longer exists and the others have materially changed direction since then--but I was correct that ratings systems would appear and evolve. Back then, I wrote, "When that happens, we'll let you know." It's been a long time coming, but I'm keeping that promise.

Marydee Ojala Editor-in-Chief, Online Searcher

Marydee Ojala (marydee@xmission.com) is editor-in-chief of Online Searcher).
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Title Annotation:the dollar sign
Author:Ojala, Marydee
Publication:Online Searcher
Geographic Code:1USA
Date:May 1, 2019
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