Asking the tough questions in ESG

To overcome gaps in ESG disclosure and the lack of standard data, new benchmarks rely on more direct engagement

Asking the tough questions in ESG

While ESG investing has started to take off among investors and fund issuers alike, there are still many issues to iron out on a portfolio-management level. For example, fossil-fuel companies may still be considered green if they are working to become more environmentally friendly, which may be an unwelcome surprise for those who want zero exposure to sin stocks. There’s also the question of how to consolidate and reconcile non-financial data from different companies — assuming their disclosures are complete to begin with.

Those are some of the challenges that S&P Dow Jones Indices [SPDJI] aims to tackle with its own house-brand ESG index series. “[T]he new ESG benchmarks include single-country and regional indexes, as well as indexes for developed and regional markets,” reported “Notably, there's also an ESG version of the signature S&P 500 Index.”

Speaking to the industry publication, Mona Naqvi, senior director of ESG Indices for SPDJI, explained that the sheer diversity in data sources can make due diligence quite costly for investors. Specifically, unpacking the methodologies and guaranteeing that the whole data collection is robust can be expensive, both time-wise and resource-wise.

“One reason for that is low disclosure from companies, though that's improved significantly over the years,” Naqvi said, noting that companies either do not report or do not necessarily submit complete or flawless reports. “A lot of ESG data providers even leave some estimates blank for companies or apply industry averages.”

To overcome those shortfalls, SPDJI’s ESG scores go beyond public disclosure. The firm uses an annual survey, the Corporate Sustainability Assessment, to converse with companies directly on material issues and enable a more in-depth evaluation of corporate sustainability performance.

“Often, that's a level of detail that … they're more than happy to share in a conversation with us,” she said.

Such conversations, Naqvi added, can become opportunities to head off any potential problems by discussing timely issues “long before companies are publicly disclosing them.” One example is how some surveys covered the issue of tax avoidance in 2016, which some companies had not necessarily considered as a problem before.

To address sudden ESG-related events or controversies that could negatively impact index constituents, Naqvi said the body that does the scoring conducts “media & stakeholder analysis,” informed by real-time news monitoring. “If the specific controversy has a material impact on the score, we have an index governing committee that has the discretion to remove any companies from the index in between rebalancing dates,” she said.

To ensure that the scoring is accurate and objective, Naqvi said that they require robust evidence to substantiate responses, which in some cases involves auditor documentation and assurance. She added that the scoring methodology for the indexes is also audited and subjected to quality control checks.

SPDJI has had a two-decade history in providing global sustainability benchmarks, and it has implemented some changes from its original methods. That includes what happens if a company doesn’t respond to a particular question: while that would result in docked points for the company before, now a penalty can only apply if more than 50% of its industry peers responded to the question it left unanswered.


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