One of the challenges of indexed investing for investors seeking to fulfill their stewardship responsibilities is that their equity benchmarks include companies with a poor performance track record — on financial returns, as well as on environmental, social and governance practices. As most indexed investors are by nature long-term, ESG practices are a focus because they have considerable potential to affect performance over time. Sound practices in relation to the material environmental and social aspects of a company's business can be a signal of operational excellence and management quality.
ESG risks constitute seven of the top 10 most concerning global risks in the World Economic Forum's annual “Global Risks 2015” report. But they are difficult for investors to incorporate into investment analysis and stewardship activities, as investors do not yet have the complete, consistent and comparable data required to accurately measure how companies are managing them.
If BlackRock wants to compare the financial performance of, say, telecom companies in Singapore, the U.S. and Spain, we can rely on a set of widely understood international accounting standards. If we also want to compare the carbon dependency, employee turnover levels or the number of independent directors of those companies, it is either impossible due to lack of disclosure or requires so many assumptions and extrapolations that the output is nigh on meaningless.