How is Wall Street collecting and using ESG metrics?


With Wall Street racing to analyze corporate environmental, social, and governance (ESG) data and create new products for the many investors paying attention, companies that aren’t monitoring and improving the right KPIs will soon find themselves at a disadvantage.

Key Takeaways
  • Major investment firms and data providers are scrutinizing their investments based on environmental, social, and governance factors and adding products and services to support the rise in interest among investors.
  • A majority of companies are recognizing the need to provide the new data sought by investors.
  • Companies need to integrate ESG into their financial reporting and management by understanding the new criteria being used to measure them and making plans to improve in those areas if needed.

Wall Street thrives on the capability to weigh, measure and count just about everything that can provide an edge. And in a global economy punctuated by disruptive change, investors are increasingly looking beyond traditional financial reporting and metrics for tools that produce greater insight into new opportunities and the assets in their portfolios.

At the same time, many of the legacy physical assets companies once carried on a balance sheet no longer drive value in the ways they once did. These are being replaced in importance by more intangible assets. A study by Ocean Tomo found that between 1975 and 2015, S&P 500 companies’ intangible assets grew to become 87% of their value—more than a 400 percent increase.  

So it’s no surprise that Wall Street’s major investment firms are putting resource muscle behind gathering data and securitizing companies based on a better understanding of intangible assets and business factors— many of which turn out to relate to a company’s environmental, social and, governance (ESG) performance. And an increasing body of research is concluding that ESG factors strongly correlate to financial results. For example, MSCI analyzed more than 1,600 global developed-market stocks from January 2007 to May 2017 and found that High ESG-rated companies tended to show higher profitability, higher dividend yield and lower tail risks.

Investors have not sat idly on the sidelines either. Today, it is estimated that approximately one quarter of the global assets under management (AUM)—meaning more than $20 trillion—are based on ESG-related instruments.

Taken together, these trends present a compelling case for corporate leaders to incorporate ESG metrics in their disclosure practices if they haven’t done so already.

ESG adoption rapidly becoming mainstream

Once the purview of smaller funds focused on social impact and socially responsible investments, ESG has evolved beyond the mere support of social and environmental initiatives to a foundational framework for companies to manage financially significant risks, position themselves for new market opportunities, and provide greater transparency across a variety of key business factors. At the end of 2017, 85 percent of S&P companies published corporate sustainably reports, up three percent from the prior year.

As the number of companies incorporating ESG metrics as part of their reporting continues to rise, and the number of ESG-focused products along with it, major financial institutions and data platforms are wrestling with how best to incorporate these metrics into their due diligence efforts and offerings.

For example, Vanguard, with over $4.4 trillion assets under management and approximately 8.29 percent of its portfolio held in CRI shares, has identified climate risk as a priority for the foreseeable future. As a result, they are seeking public company disclosures on the risk of climate change to a business board and management oversight of climate risk. In addition, they evaluate climate risk disclosures and analysis based on industry leaders and peer reviews performed by Sustainably Accounting Standard Board SASB) and others.

Blackrock, with $5.7 trillion in assets under management, has broadened its agenda for engaging with companies. Issues like diversity and gender balance in the boardroom are just a few of the metrics they are examining. In addition, for companies in sectors where climate risk is a key factor, Blackrock expects the boards to have tangible fluency in navigating climate risks to the business along with management’s plan to mitigate those risks. Similarly, virtually every other significant investment management firm is adopting specific priorities and assembling efforts to evaluate companies on them.

No longer optional

Many companies may be surprised to learn that they are already being evaluated on ESG data whether they are ready for it or not. The investment research firms mentioned earlier such as MSCI are offering a raft of products and services in this area. So, what can you do to get started on integrating ESG metrics and better prepare for—and sometimes pre-empt—questions and resolutions from shareholders?

  • Understand your specific investors’ needs and expectations. They may be already evaluating your company based on ESG criteria, and the lenses being applied to your company and industry will be unique to your own investor base.
  • Conduct a peer review of ESG performance factors to understand how you measure up against competitors on essential criteria.
  • Implement an oversight and disclosure plan focused on the KPIs and material issues relevant to your investors and other stakeholders.

The bottom line is that although there is still significant work to be done to standardize the collection, analysis, and application of companies’ ESG data, it is becoming increasing clear that companies that do not adequately disclose ESG information—and improve on the relevant KPIs—are rapidly becoming the minority and at greater risk of being challenged by investors. For more information on how FrameworkESG can help, contact Victor Melendez, Managing Director & Chief Growth Officer.

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FrameworkESG Staff

FrameworkESG Staff