Corporate Sustainability Performance – Setting the Stage for ESG Data Analysis by Humans and AI Bots Alike

By Pam Styles, Principal and Founder, Next Level Investor Relations, and G&A Institute Fellow

There is an expansive reservoir of ESG data – a.k.a. key performance indicators (KPIs) – across growing corporate ESG disclosure and reporting, commercially advertised metrics and/or data sets subscription access, and proprietary third-party rater, ranker and data provider analytical systems.

While voluntary reporting frameworks and the various third parties jockey for dominance and survival, who is using all this data — and how?

Currently, there are too many ESG-related KPIs and data sets for companies and investors to get a handle on, respond or analyze.  It is impossible to predict how many more KPIs will enter the mix or how soon third-party relationships will naturally consolidate the number of KPI expectations, simply driven by necessity for their own business models’ sustainability.

The corporate disclosure side of this issue is explored in:
The End User Side

Just like corporations, investors have to prioritize which KPIs matter and what reporting framework KPIs, public access information sources, licensed and/or proprietary databases they can rationalize for focus.

CFA-PRI recently joined forces to survey 1100 investment professionals.  Survey results show that fixed income inclusion of ESG in investment decision-making is rapidly catching-up with equity investors.

Source: UNPRI

Analogous to portfolio diversification theory, the number of investments (in both time and money) in ESG data sources has got to naturally reach some optimal number needed to optimize risk/return. Beyond that there is an entire sustainable finance ecosystem too large to address in a simple blog post.

Data Use

There is not an honest person alive who can tell you that they can stay on top of all the current and increasing company ESG data they could analyze, germane to their investment decision-making.

Research of Value

In addition to 90% of S&P 500 companies, Governance & Accountability Institute just announced its annual research update that 65% of Russell 1000 companies also published sustainability reports in 2019 (up from 60% in 2018), including 39% by companies in the smallest half of the index (up from 34% in 2018).

Important Perspective

An article highlighting takeaways from the recent NIRI “Big I – Investor & Issuer Invitational Forum”, quoted speaker Dan Romito, SVP of Business Development & Product Strategy at Nasdaq:

“There is an explosion of non-fundamental data…especially in ESG data…The
SEC found that 90% of data now used in the capital markets has been created during the past two years.”

Artificial Intelligence

AI use as a tool to consume, filter and analyze, huge reservoirs of ESG data is increasingly valuable in investment decision-making. AI providers are jockeying for differentiation and capital.  For instance:

  • AI is being used by investors, such as BlackRock, to not only analyze ESG data that companies are disclosing, but to uncover other information, such as ESG impacts from satellite images of pollution to cars in a parking lot, voice inflection and more.
  • FactSet just announced, on October 20th, a definitive agreement to acquire TrueValue Labs. Founded in 2013, TrueValue is a pioneer in AI-driven ESG data. It applies AI-driven technology to over 100,000 unstructured text sources in 13 languages, to identify positive and negative ESG behavior. Its coverage spans over 19,000 public and private companies.
  • TrueValue LabsTM had previously announced on January 23, 2020, that it was introducing its patent-pending concept of Dynamic Materiality, indicating that every company, industry and sector has a unique materiality signature. The company head of research noted that, “Given how central materiality is to ESG investing and fiduciary duty, it is critical to understand the mechanisms by which ESG factors impact the operational and financial performance of companies.”

The Human Element

“While AI can unearth key data for investors seeking sustainable investments, discerning unreliable information will be a key challenge and humans will not be replaced any time soon.” – as stated in the article titled,  How can AI help ESG investing? –  S&P Global, Sept 2020

“AI is not a replacement for human intelligence, but rather a way to further it… The strategic value of alternative datasets, in particular ESG data, in the financial sector is becoming increasingly visible. As only relevant data has decision-making utility, supervised machine learning is emerging as the most effective mechanism to generate strategic value for businesses.” – Cutting through the noise: demystifying the buzz around artificial intelligence in financial decision-makingRepRisk, Sept 2020

The Final Word

In only the last few years, it became obvious that ESG/Sustainability had finally gone mainstream.  It took over twenty years to catch-on, since the first voluntary ESG reporting framework, GRI, was founded in 1997.  Now it is time to buckle-up for the ride… practically everything ESG/Sustainability-related is advancing at orders of magnitude faster pace than anything we’ve experienced thus far!

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

Purpose – This Was the Buzzword of 2019 for The Corporate Sector & Investment Community. The “Purpose” Debate Will Continue in 2020

by Hank Boerner – Chair & Chief Strategist – G&A Institute

Another in the series about The Corporate Citizen and Society

As 2019 draws to a close — we look back at a year with a lively discussion about The Corporate Citizen and Society…and “Purpose” discussions…

The year 2019 began with an important challenge to corporate leaders from Larry Fink, chairman and CEO of the world’s largest asset manager, BlackRock (with more than US$6 trillion in AUM). 

The very influential investor writes each year to the CEOs of companies that his firm invests in on behalf of BlackRock clients. There are literally hundreds of publicly-traded companies in the BlackRock portfolio (managed and indexed funds).

At the start of 2018, CEO Fink wrote that every company needs a framework to navigate difficult landscapes and it must begin with a clear embodiment of the company’s purpose (in the business model and corporate strategy).

He explained to the many CEOs: “Purpose being not a mere tagline or marketing campaign; it is a reason for the company’s being – what is does every day to create value for its stakeholders.”

Then (in January 2019) Larry Fink explained in his start-of-the-year letter to CEOs as he expanded on the theme, Purpose is not the sole pursuit of profits but the animating force for achieving them.  And, profits are in no way inconsistent with purpose; in fact, profits and purpose are inextricably linked.

This 2019 communication to CEOs pointed out that the world needs their leadership (especially) in a polarized environment. Stakeholders are pushing companies to tackle social and political issues as governments fall short of doing that.

And (very important) Millennials, now outnumbering the Baby Boomers in the workforce, represent a new generation’s focus – on various expressions of, and clear demonstrations of corporate purpose.

The January 2019 letter of course created a buzz in the corporate sector and in the capital markets as people thought about the meaning and weighed in on all sides of the issue.  What many agreed with was that there were now clear signals that the half-century doctrine for the corporate sector of “shareholder primacy” was giving way to “stakeholder primacy.”

As the purpose discussion rolled on, in August 2019 the influential Business Roundtable issued a revision of its Statement on the Purpose of a Corporation, signed by 181 of the CEOs of the largest of American companies (firms both publicly-traded and privately-owned). 

Important step forward: the CEOs publicly committed to lead their companies for the benefit of all stakeholders: customers, employees, suppliers, communities, and shareholders.

The Roundtable’s Principles of Corporate Governance has been issued since 1978; from 1997 on this endorsed the principle of shareholder primacy (that corporations existing principally to serve shareholders).  The new statement, said the BRT in summer 2019, outlines a modern standard for corporate responsibility. 

The team at G&A Institute looked at the companies whose CEOs are members of the Business Roundtable (almost 200 in all), examining their public disclosures and structured reporting on “walking-the-talk” of “purpose” and “responsibility to stakeholders” 

What are the companies doing — and how are they telling the story of the doing — the walking the talk?

Our approach was to analyze the means of disclosure and reporting “on corporate purpose” and the focus on any related content of sustainability / responsibility / ESG / corporate citizenship reporting by the BRT member companies.  (The good news to share:  there’s plenty of relevant information on purpose in the leadership corporate reporting. You can read through the respective corporate reports to divine the meaning and expressions of purpose in the pages.)

The analysis is available on the G&A Institute web site – see this week’s Top Story for the headline and link to our Resource Paper. There are relevant links there as well.

What will the purpose of the corporation discussion be in the new year, 2020?  Stay tuned to the perspectives shared that we’ll have in our G&A Institute Sustainability Highlights newsletter and on this blog.

Best wishes to you for the holiday season from all of us at G&A!

BlackRock CEO Larry Fink’s 2019 letter: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

G&A Institute Releases Analysis of The Business Roundtable Companies’ ESG Reporting Practices
Source: Governance & Accountability Institute

Highlights:

 Governance & Accountability Institute’s research team examined the ESG / sustainability reporting practices of the BRT signatory corporations to examine trends and create a baseline for tracking progress and actions going  forward.  G&A released these initial benchmark results in a resource paper available on our website.