The topic of Environmental, Social and Governance (ESG) investing is moving from an ancillary one to a specialization because of the increased importance of ESG to investors and how performance is being tracked through the right ESG metrics. The focus on ESG pertains to all companies, including those that don’t even specialize in ESG products or services. ESG is new territory for many companies. One of the many challenges associated with ESG is how they can identify which criteria to meet across an entire product range. The challenge is made even more difficult because of the limited amount of information that’s available to them.
Lessons from One Company’s Initiative on Sustainability
The board directors at BNP Paribas Asset Management made sustainability a pillar of their strategic planning. With no clear path to follow, they set out to establish their own system for analyzing ESG metrics and sustainability. They appointed Helena Viñes Fiestas, the head of sustainability research, to develop and oversee this new and important initiative. Viñes Fiestas was charged with meeting clear ESG criteria across BNP’s entire product range.
Viñes Fiestas quickly took the helm and established an internal sustainability center and a sustainability committee. The firm’s CEO is chair of the sustainability committee.
To get clear metrics, Viñes Fiestas felt that she needed to integrate ESG work into all the other teams. She involved investment, product development, communication and marketing teams. The new sustainability center coordinates the integration between all departments.
Part of the company’s strategy aimed to meet United Nations Global Compact principles in all their investments. The company was able to get some of the ESG metrics from external research partners through corporate sustainability reports. Viñes Fiestas decided that they needed even more information, so they developed their own indicators.
Staff sorted information by sector, sub-sector, market capitalization and geography and filtered them into a matrix. This process made it easier to rank companies according to these indicators. Their matrix encompasses more data than what the United Nations Global Compact principles cover, such as conventional oil and gas and the mining and farming of palm oil.
BNP’s policies are now mandatory. They exclude companies that don’t comply with policies from all funds and other ownership activities.
As part of analyzing ESG metrics, Viñes Fiestas and her team don’t take external research at face value. They dig deep into corporate annual and sustainability reports themselves in search of more detailed information. For example, they’re looking for the true costs behind CO2 emissions and water and energy usage. The team also looks for information on how companies do their research, how they market products and what their policies are regarding intellectual property.
One of the team’s goals is not just to collect data about a company’s ESG policies, but to analyze the company’s performance against them. Ultimately, they want more information about how a company’s policies affect their end users. Having an in-house team that provides additional ESG metrics places them in a proactive position that provides the best service to their clients.
BNP sustainability teams also collect data on where companies invest, where they conduct their clinical trials, how they report them and what the result is on human health. The teams also analyze whether companies get useful data from their research and development efforts. When teams aren’t able to uncover sufficient information, they take even more steps by requesting meetings with management.
Challenges in Broadening Scope of ESG Issues: ESG Metrics Matter
The bulk of the questions from investors have centered around transparency of ESG metrics. As of late, that information has been easier to get. In addition to basic ESG metrics, investors want to know more in-depth information about how the data relates to performance.
Many companies are looking at and disclosing ESG metrics as they pertain to current targets. Investors would like to see that same data as it relates to future targets and what the company’s strategy will be for meeting them.
For example, Viñes Fiestas states that of the top 20 utilities that they analyze, only one out of nine provide targets for future carbon emissions. Investors want to know how companies will address this type of data in the future.
Quality of Management and Policy
Currently, much of the information that companies provide is essentially anecdotal. For the present, European companies tend to be better at publishing regulatory targets. Investors will also be looking at the transparency of the quality of management and policy. Companies that do their work won’t think twice about being transparent. Conversely, companies that choose not to be transparent risk being passed over by investors.
Investors will be looking for information that’s meaningful, comparable and consistent. Many of the disclosures that companies provide on corporate governance are better than disclosures for environmental and social matters. Viñes Fiestas says that she’d like to see compulsory reporting regulations rather than just “comply or explain” rules.
ESG is a modern governance challenge for board directors, and it calls for a modern governance tool to manage it. ESG is an issue that demonstrates what it means to have a governance deficit. Overall, boards and executive teams lack the data regarding ESG for them to ask the right questions, so that they can get the right answers. Investors are demanding more in the way of visibility and transparency around the data that they care about so that they can make wise investment decisions. To deliver on these expectations, companies will need to offer insights into their companies, across the industry, and provide a picture of what the future looks like.
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