Investors sift through tons of data to work at a consistent approach

U.S. companies can legitimately claim "survey fatigue" as investors and money managers seek more information about how ESG issues and risks are addressed, but there is also a need for getting more uniform information back to the investors, industry observers said.

Currently, companies deal with competing standards for disclosure of ESG data, which in turn can be equally confusing for investors trying to assess the ESG risks they care about for the companies in which they invest. The end result can be lots of time spent by investors, companies and ESG advocates trying to get critical risk management information to figure out what it means for long-term performance.

"Investors are still figuring out what the best information is," said Emily Kreps, global director of investor initiatives with CDP, a non-profit that runs a global disclosure system, where more than 7,000 companies answer detailed questions about how they address and prepare for environmental impact and supply chain issues. While initially focused on corporate equities, the program has grown to include information useful for evaluating corporate bonds.

In 2019, more than 525 investors with $96 trillion in assets were CDP signatories, up from the 35 investors that signed up for the first questionnaire in 2002 asking 500 of the world's largest companies about climate change. Today, more than 7,000 companies worldwide respond, with the highest number being U.S. companies, including 70% of the S&P 500.

"The important part of the disclosure process is that it asks all companies to respond to the same question, which allows for comparison," said Ms. Kreps.

The information disclosed has triggered a proliferation of scores and ratings that are derived from it, including from asset managers creating their own data systems, she said. "That can lead to investors saying, 'What am I supposed to be looking at?'" To answer that, CDP and other groups are working to make it easier to align reporting requests to companies and to get the most relevant metrics for investors, she said.

Many investors also turn to a framework developed by the Sustainability Accounting Standards Board with the aim of doing for sustainable investing what the Financial Accounting Standards Board has done for accounting. The framework released last fall analyzed 77 industries along a consistent range of environmental, social and governance metrics to help investors assess potential ESG financial impacts. Companies involved in oil and gas exploration and production, for example, are asked to report on greenhouse gas emissions, air quality, water management, worker health and safety, legal and regulatory risks, and numerous other topics with the potential to impact their long-term sustainability.

"A number of us are using the SASB issues list for thinking about what issues to diligence and monitor over time. It is definitely a tool that we use," said Elizabeth Seeger,director of sustainable investing at KKR & Co.

Having Washington mandate a standardized approach is another matter. The growth of ESG reporting standards developed by non-profit organizations like the SASB and the Global Reporting Initiative, which promotes sustainability reporting standards, "does not mean that issuers should be required to follow these frameworks," said Securities and Exchange Commission Chairman Jay Clayton, who so far seems unmoved by the European Parliament and European Union's sustainable investment disclosure rules for institutional investors. Those rules require money managers, insurance companies, pension funds and investment advisers to integrate ESG factors into their portfolios, and disclose investments in a consistent way.

"Everybody wants more disclosure. We would argue it should be mandatory. The SEC is not seeing it that way at the moment. Regulators go in and out of wanting to do more," said Mindy Lubber, CEO and president of Ceres, a Boston-based sustainability non-profit working with investors and companies. Still, she sees more disclosure being made in general, and of better quality.

"Disclosure is a big conversation now at the board level," said Erika Karp, founder and CEO of Cornerstone Capital Inc., a New York money manager working with corporations, asset owners and financial institutions to promote ESG analysis and facilitate capital introductions for organizations engaged in sustainable business practices.

Noting that Volkswagen AG stopped reporting emission data before its scandal, "sometimes it is more important what they don't disclose," she said.

Ms. Karp, the former head of global sector research at UBS Group and an early advocate of sustainable investing, encourages asset owners to be more involved and not leave it to managers. "I still think there is an asset owner gap. I think we need to move toward active ownership."

Sudhir Roc-Sennett, head of ESG for the quality growth boutique of Vontobel Asset Management, inNew York, agreed. "There is no substitute for doing the homework. It's really about avoiding tripwires and doing the best you can do."

Voluntary approaches like the United Nations-supported Principles for Responsible Investment, a network of investors advocating for sustainable investing, "is a very good way of cajoling managers into things. I think the voluntary stuff is going to be a global driver, and that is a more predictable way to go in the U.S.," said Mr. Roc-Sennett.