When I started my writing career as an analyst for Morningstar, what made it work was my appreciation for data. Indeed, one reason I like financial communication is that it aspires to speak truthfully to a sophisticated understanding of the world, as represented by data. And that’s what makes it so hard for me to utter this sentence:
ESG data is terrible.
Ok, that’s a bit of an overstatement. But it’s much less of an overstatement than I am comfortable with. And it’s a bold snub to the big responsible investing players who are chasing the ESG measurement “golden goose.”
The ESG establishment has been tiptoeing around this reality for years. There have been studies about the lack of correlation in ESG evaluations and the inconsistency in corporate reporting. These suspicions, rarely addressed directly by asset managers and advisors, are fueling a persistent skepticism about whether the average ESG data point is creating any meaningful good in the world.
Perhaps the study we are most interested in is this one from Harvard Business Review. It reported a troubling conclusion: the more ESG data a given company reports, the wider the variability in the ESG scores it receives. In other words, more data is only creating more confusion.
“A metric like workplace diversity or water consumption can be defined differently depending on the standard you choose to adopt. Furthermore, there is no validation or auditing of this data, so as a stakeholder you can’t be fully comfortable with its quality. If we compare this to financial reporting, for example, we need to go back around 100 years to find the same level of maturity.” – Sara Bernow, Partner, McKinsey, May 26, 2020 Podcast, Why ESG is Here to Stay.
Over the past year, we’ve gathered hundreds of examples of ESG-related reporting and related communication, trying to understand this apparent conundrum. We plan to report our findings in-depth in one of our Previews from Our Sample Library later this month.
Honestly, though, the answer is pretty straightforward – ESG data just isn’t there yet, and might not get there anytime soon. There are just too many fundamental issues and no common foundations. There are no earnings per share that you can hold in your hand; no volatility against a benchmark that you can check online every day. Data about reduced carbon emissions might mean a lot to a climatologist, but it’s beside the point to someone who wants to encourage more minority access to capital. As Obi-Wan might say, all the ESG data truths are only true…from a certain point of view.
And here lies the risk to the health of the entire responsible investing industry. Money management has a history of building client relationships through data. You can market and communicate all you want, but in the end, your clients would see the impact of your choices in their daily share price. It is the proof that you know what you’re doing. That you can be trusted. Responsible investors are desperate to find a similar proof point.
Our thought is that we’re looking in the wrong place. We’ve discovered that the most credible ESG communications are the ones that focus more on describing cause and effect – explaining the decision making, the strategy, and the outcomes. Typically, case studies and process diagrams do the best job of this. They show how ESG gets integrated into their investment process. They tell the stories behind their decisions.
There are a few best practices we have been recommending to our clients. They include:
- When you use data, be honest. Where does it come from? Why did you choose it? What does it measure, and more importantly, what doesn’t it measure?
- Be transparent about what you do from an ESG perspective. Use process diagrams to identify your ESG priorities and resources, and where they are applied in your decision-making process.
- Use company stories as your proof point. ESG investors are interested in more than a firm’s stock price. Telling them how the companies you hold act on ESG issues, and why you invest in them, makes visible the kind of ESG investor you are.
Responsible investing is enjoying phenomenal growth in demand for its products. But if the industry doesn’t conquer the skepticism that surrounds it – often from its own proponents! – it runs a very real risk of squandering the moment. While our industry will develop better data and clearer standards over time, that process is likely to take years, when the opportunity is now. To win that challenge, we need to not only provide better data – we need to learn to tell a better story.
About Purcell Communications:
Purcell Communications fosters trust in the Investment Community through effective communication strategies and content. We do this by using the language of long-term relationships: content that reveals, messages that resonate, and an authentic voice centered on the concerns of investors.
Achieving this mission demands an understanding of investors – institutional and retail; advisors and asset managers; those driven by financial returns and those driven by social impact. We leverage this understanding to help advisors and asset managers communicate in a way that demonstrates they are worthy of investors’ trust.