Don’t Count On It
What is measured, can be managed. But the measurement manages us too. A metric or rating spins a story. It tells our employees, customers and investors where we have been and where we want to head next.
That’s why a tobacco company’s triumphant bronze medal as the third most environmentally and socially responsible companies in the FTSE 100 should stop us in our tracks.
The company’s focus on the environment and the human rights of its farmers boosted its score, said commentators. It watches its water consumption and is making progress in its quest for carbon neutral operations. It recycles.
But it also produces, distributes, promotes and profits from a product that harms people.
Global investing has changed. Capital markets are increasingly powered by publicly available, extra financial information. Whether pragmatically or passionately, asset managers and owners have embraced environmental, social and governance (ESG) criteria.
The value of global assets applying ESG data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to hit $40.5tn in 2020. Total assets in sustainable funds hit a record of almost $1.7tn in 2020, up 50% from 2019. Some predictions suggest all global assets will be managed with reference to sustainability criteria as soon as 2025.
These measures undoubtedly matter. Yet there are innate challenges in measuring non-numerical outputs – such as environmental impact or social influence – with numbers. And ironically, there isn’t regulation or standardised disclosure requirements to govern ESG reporting of good governance.
As the Harvard Business Review reminds us: “the data inputs we start with are fundamentally less structured, less complete, and of lower quality than financial data, which companies are required to present in standardized form and have audited by accountants.”
Data sources vary dramatically and methodologies are inconsistent. The majority of ESG research is undertaken either inhouse, with a view to generating proprietary datasets, or through third-party data and ratings agencies who defend their commercial advantage with protected practices.
Meanwhile, capital markets are increasingly underpinned by data, both extra-financial and financial, and the value of timely, clear, relevant, accessible information has never been more apparent.
I suspect the ratings make fools of us all when a tobacco company is ranked third to pharmaceutical companies who sell medicines for the illnesses caused by sustainably produced cigarettes.
Let’s step back and think again. To be 'investable' to the widest pool of investors, you must bypass screens, appeal to ESG-minded fund managers and rank in sensible sustainability indexes: all of which is more easily achieved through the right counsel, content and communications.
This is the way to connect measures with meaning, and connect your stats with your story.
