Conscious Consumer: Get Engaged – Sustainable Investing Part 2

Sustainable Investing Part 1 discussed the societal, environmental, business, and political trends driving sustainable investing. It also provided an overview of different types of investment approaches—from divestment in companies causing the greatest harm to tilting investments toward companies with the most sustainable businesses, processes, and/or mission, as well as links to investment product reviews.

This next article, in the sustainable investing series, will take a closer look at the role of investor engagement and activism in the age of sustainability. It will also touch on trends in sustainability reporting and ratings.

Engagement and Shareholder Proxy Voting

More and more, sustainable investment managers are exerting influence through engagement and proxy voting on ESG resolutions to nudge corporations toward more sustainable business practices. ESG pioneers have distinguished themselves with their high level of corporate engagement and solid track records of voting for pro-ESG proxy resolutions. In 2021, large money managers started demonstrating their ESG values with more pro-ESG proxy votes, particularly shareholder initiatives focused on more transparent, standardized ESG reporting and board directors that support it. This could turn out to be among the biggest societal benefits of the sustainable investing trend.

Increasingly to be credible, sustainable investment managers also need to walk the talk (lead by example) at their own firms, which includes supporting net-zero/climate change actions; workforce diversity, equity, and inclusion; overall treatment of workers; board diversity; and political advocacy. Investment management leaders should also be investing in their firm’s sustainable investment funds.  

Reporting and Metrics

Sustainability reporting and metrics have evolved substantially over the past 5-10 years and are still evolving from glossy public relations tombs to providing meaningful benchmarked metrics. Still there is a way to go in achieving global corporate alignment on the UN sustainability framework targets. As reporting standards are agreed upon and more widely reported on, the expectation is that there will be greater corporate alignment and action toward achieving sustainability goals. Principles for Responsible Investment, Task Force on Climate-related Financial Disclosures, Sustainability Accounting Standards Board, and Global Reporting Initiative are among the organizations developing reporting frameworks that shareholders are increasingly pushing companies to implement.  

The Investment Company Institute backs two widely used voluntary disclosure standards, those of the Task Force on Climate-Related Financial Disclosures and from the Sustainability Accounting Standards Board. 

This year, there are more shareholder proposals to make public the racial, ethnic, and gender makeup of their employees either through public disclosure of company EEO-1 filings (Companies must file an annual EEO-1 form with the U.S. Equal Employment Opportunity Commission but are not required to make this information public.), or by having an outside auditor conduct a racial audit.

Sustainalytics, MSCI , S&P Global , Refinitiv, and  FTSE/Russell calculate ESG company ratings and construct ESG indices. Morningstar/Sustainalytics, As You Sow, and Ethos publish ESG ratings for investment funds as well as companies. Additional ESG data sources include: CDP, Just Capital, Corporate Knights, Robasciotti & Philipson, Violation Tracker, 2020 Women on Boards, DiversityInc, OSHA to name a few. 

Some ESG investment managers have developed proprietary sustainability rating systems using data from numerous sources and integrated ESG factors throughout their investment processes. However, sustainability reporting metrics are not yet standardized or mandatory. Several of the ratings providers analyze hundreds of data points per company. There is wide variation in terms of company coverage, what information is reported, and how sustainability ratings are computed. Sustainalytics, MSCI, S&P, Refinitiv, and FTSE Russell have the widest global company coverage, yet there are  different ratings in about half the cases, for companies where data exists. 

Here is an illustration of the current ESG rating differences (based on data available on May 7, 2021).

MSCI scores Tesla and Total SE (French diversified energy company) the same on ESG.  S&P thinks Tesla is worse and Total SE is better. The underlying explanatory data provided by MSCI and S&P differ for a given company, highlighting how the use of different input data (quantitative and qualitative) results in different ratings.

Tesla produces cleantech products with average ratings on product safety, quality & carbon footprint.  It is lower ranked on labor relations, and management of ESG issues. It also invests a substantial portion of balance sheet cash in Bitcoin, a massive power consuming asset.

Total SE produces a carbon-laden products, yet it has laid out a plan to produce more “responsible energy” and be net zero carbon by 2050, has a gender balanced board, and has strong ratings for management of ESG issues.

Despite the current challenges of wrangling these nuances, ESG data will keep evolving as shareholders, industry groups, and regulators push for more standardized sustainability reporting.  This should bring about greater clarity in sustainability data, ratings, and opportunities for enhanced stewardship.

A variety of sustainability ratings exists for mutual funds and exchange traded funds (ETFs).  Morningstar’s Sustainability Rating evaluates financially material ESG risks in a fund and is provided alongside of Morningstar’s analysis of historical and projected investment performance.  As You Sow and Ethos investment fund ratings are ESG-focused, including both financially material and mission/value-based factors.

In the US, there are currently no agreed definitions or disclosure requirements for sustainable investment products. However, a SEC team within the enforcement division will be more closely scrutinizing investment advisers and funds touting sustainable products.

Actions to Take

Sustainability minded individual investors can engage in several ways. 

1. Understand what you own. Review the sustainability ratings for your current stock, bond, and fund holdings, and evaluate how well current holdings align with your sustainability, investing, and risk goals.  Reference two or more sources for a more complete picture.
2. Pay attention and act upon proxy voting notifications for your individual stock and fund holdings. Proxy statements can be found on company websites, and voting records can be found on corporate watchdog websites such as As You Sow and Proxy Monitor. For a really deep dive, Institutional Shareholder Services (ISS), Glass-Lewis, As You Sow, and Proxy Preview publish annual proxy voting guides.
3. Integrate ESG data into future investment decisions. Talk with your investment advisor about their process for including ESG factors in future investment/divestment decisions.  Self-directed investors also have the option of including ESG data and rankings in their investment process.  

This article is for informational purposes and does not constitute investment or tax advice.  This information should not be relied upon as a primary basis for an investment decision. Investors should consult their tax and investment advisors for more information regarding their specific situation.