New York – When looking at the ESG research space, it doesn’t take long to realize that the classification actually covers a diverse set of disciplines and spurious data sets. In fact, one wonders why these disciplines are lumped together into one large set, rather than dealt with in discrete segments. After even further reflection, however, it all becomes clear.
One way to estimate an enterprise value is to assess, not only the worth to the shareholders, but also the value to other stakeholders in the business: debt holders, employees and the local or global community. Let’s take a look at the constituent parts one letter at a time.
The assessment of the environmental impact on the “community” relates to the measurement of global greenhouse gases and other pollutants that are a bi-product of the production process. In welfare economics, these are called negative externalities. Environmental factors, such as carbon emissions and other greenhouse gases are one factor that can be measured, though it is very detailed and extensive work. One research provider out of London, called Trucost, appears to have the most robust dataset on carbon emissions we are aware of. In addition, the firm uses microeconomic techniques to assess the impact of these negative externalities.
Social factors are somewhat more difficult to corral. An area called SRI (Socially Responsible Investment) tends to dwell in this camp, though it also covers the environmental area as well. The social analysis has tended to deal with how employees are treated relative to the management of a corporation, labor law violations—including bans on products that are produced outside of the US which do not adhere to US labor laws. Additionally, this area has grown to include harmful products, such as tobacco, alcohol and drugs. Some investor groups have internal rules about investment in companies that produce these products. In this area, a prime example of a market leader is KLD Research and Analytics. KLD creates indexes, manages lists of banned companies for money mangers that do not adhere to the investors’ requirements, assess the compensation disparities between management and employees for its clients, and general factors that promote productivity and ownership among employees.
Governance analysis deals with the powers and controls available to shareholders, the board and management in the governance of the company. As such, the topic is also quite broad: dealing with board accountability; financial disclosures; internal controls; shareholder rights; executive compensation; and ownership base. An example of a research provider that covers this space is GoveranceMetrics International. GMI rating reports include a summary of the company’s overall governance profile and commentary on each of six research categories employed by GMI: 1) Board Accountability; 2) Financial Disclosure and Internal Controls; 3)Shareholder Rights; 4) Executive Compensation; 5) Market for Control and Ownership Base; 6) Corporate Behavior and CSR Issues.
Another company that covers this space from a different angle is Glass Lewis. Glass Lewis provides investment research, class action settlement solutions, and proxy services to its clients.
It is safe to say that it is difficult to directly compare one ESG firm to another. The analysis and data utilized in ESG analysis covers everything but the kitchen sink. Then again, the kitchen sink is a source of grey water, which may hit the radar as an environmental risk soon enough.