November 26, 2010

I attended the NYSSA-SIF conference on environmental, social, and governance (ESG) investing at Bloomberg’s beautiful offices on Tuesday morning, accompanied by about 150 people (maybe more), mainly investors and analysts. The debate over whether funds that consider ESG factors generate alpha was still surprisingly strong: the panel of academics was split, while the practitioners who spoke maintained that there is significant value in ESG-based analysis.* Threaded throughout was the sentiment expressed by several in the room: we need more data.

To be fair, there is far more publicly available ESG data than there was only a few years ago. Despite the growth in the number of ESG data providers over the past few years, however, much of the data supplied is not normalized and so makes for difficult comparisons across sectors and across companies within a given sector. To be useful, remarked Curtis Ravenel, Global Head, Sustainability Group at Bloomberg L.P., information must be quantitative and normalized, emphasis on normalized. Ingrid Dyott, a portfolio manager (PM) at the asset management firm Neuberger Berman, noted that PMs rely heavily on information provided by the company. It follows, then, that if the information the company provides is not placed into context or given in readily comparable form (i.e., quantitative or normalized), the PM will have to find a way to contextualize it and compare it with information about other companies. In other words, information lacking context makes the analysts’ job more difficult.

As I listened, I thought of the many investor relations officers (IROs) with whom I’ve spoken over the past several years who tell me that the investors and analysts are not asking for any ESG information, let alone quantitative, normalized information. So here were investors and analysts saying they need large amounts of ESG data, and many more IROs are out there saying that no one is asking for the information. What gives?

Here are some possible reasons for the disconnect:

1.    Shareholder activism requires shareholding: if a PM is interested in a company but wants to see progress on ESG issues before s/he invests, the PM has little-to-no influence unless the fund owns shares in the company.

2.    Child psychology in the C-suite: Activist shareholders generally urge action on an issue through the threat—no matter how subtle or remote—of shareholder resolution. And management usually doesn’t like being told what to do. I’ve been privy to management’s response to investor requests for disclosure of ESG information; the internal conversation went something like this: “To hell with them; if they don’t like what we’re doing, they don’t have to invest.” Sullen silence will either whet the investor’s appetite for more aggressive, not to mention lengthy and costly, activism or squelch it.

3.    What you see is what you get: According to a recent report from PriceWaterhouse Coopers, today 81 percent of all companies publish “CSR” information—likely ESG information in some form or fashion—on their websites. The PM who seeks ESG data and finds only information on corporate philanthropy and community involvement on the company’s website may conclude that it’s too much trouble to start a more substantive conversation and simply decide not to invest. Hence, from the IRO perspective, no one’s asking.

So here’s my challenge to PMs and analysts everywhere who value ESG information: Whether shareowner or not, ask the questions. If you don’t get the information you seek, reframe the question. Be professional, but be persistent. If enough of you ask, no one can claim that no one’s asking. Even better, you might get an answer.

If you’re an investor or analyst and you’re reading this, let us know what kinds of information you’d like to have from companies that you’re not getting.

Posted by: Kathee Rebernak

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