Launching the ESG & Impact Investment Forum – part 3

Maala International conference 2018

Contributed by: Sagit Porat

ESG data available for investors; new reporting frameworks for companies who are looking to manage and report on their ESG performance

 

Reporting is the basis for attracting ESG investors. ESG has to be something at the core of the business strategy. There has to be someone in the company dedicated to driving this agenda, owning it, and making sure that management is behind it.” Karen Mazor, Bank Hapoalim

 


Podcast:

Main discussion points:
  • The ESG dataset is very popular on Bloomberg, with 100% annualized growth in demand since 2015. The data is very diverse in the market, tools are developed to help users consume data efficiently, and create engagement opportunities with the companies.
  • Data is used for a preliminary screening mechanism, but the market is going into a more transitionary or sophisticated phase in the ESG framework.
  • Data quality is an issue. Although we are overwhelmed with data, available ESG data is sporadic and very different from other investment data. Trends in the market intend to identify more comparable data reporting.
  • Companies are suffering from ESG questionnaire fatigue. It is a challenge for a company to track data and make them understandable for asset owners and companies. This also results in bias, as only very large or mega-cap organizations can accommodate all this information.
  • The Sustainability Accounting Standards Board – SASB, intends to solve some of the data challenges, with an explicit focus on financial materiality for the investor community. It developed a rigorous set of nearly a thousand metrics for 77 industries, but only 5-13 metrics per industry, to avoid an additional reporting burden on companies.
  • Not every company and not all ESG factors are material for every sector. More targeted disclosure is needed. It is important for companies to have a dialogue with ESG rating agencies, to improve their commitments toward CSR and understand what investors are looking for, what is changing.
  • Trust and reliability of data are important and challenging issues, highlighted by the case of Volkswagen.
  • The integration of ESG and financial data is imperative. New ESG hedge fund Value Square integrates ESG data thoroughly with financial information. Bases on screening by Vigeo Eiris’ SDG product, companies are selected; reviewed from a financial analysis perspective; and then evaluated with regard to relevant sensitive ESG areas.
  • Israeli companies need to understand the importance of reporting in English, in addition to the obligatory Hebrew reports, in order to be reviewed by investors and rating agencies.

Maala International conference 2018. Photo by: Netanel Tobias

Moderators

Karen Mazor, Head of Investor Relations at Bank Hapoalim 

Itamar Schwartz, Head of Sustainability & Corporate Responsibility Group at BDO Consulting

Speakers

Dror Elkayam, Environmental, Social and Governance (ESG) Group at Bloomberg

Jeff Cohen, Institutional Product Strategist at SASB

Elise Attal, Institutional Affairs Manager at Vigeo Eiris

Noga Levtzion Nadan, CEO of Greeneye and Founder and Partner at Value Square Responsible Investment Fund

 

Discussion:

Dror Elkayam | Bloomberg – main points

Dror Elkayam, Maala Conference 2018. Photo by: Netanel Tobias

Data is the backbone of Bloomberg, and one of the current most popular datasets is ESG. It’s quite unique when you compare it to fundamentals, to fixed income and other traditional data out there. We collect data for over 10,000 companies, 900 indicators, going back 10-15 years. The data ranges from GHG emissions, to gender pay-gap, to vote structure – basically, everything falling under the ESG umbrella. Knowing that data is so diverse in the market, we try to come up with tools to help our users consume the data in a more efficient manner. Carbon footprinting, or SDG exposure and so on.

For example, if portfolio managers want to measure the environmental impact in their portfolio, they can just drag and drop a portfolio of stocks, get a benchmark and scope out the biggest emitters in their portfolio, and perhaps also create some engagement opportunities with these companies.

Bloomberg have strong collaborations with different ESG ranking providers like Sustainalytics, RobecoSAM and ISS, which allows its users to get complementary data on what is already collected by Bloomberg. The data is mainly used for screening purposes, but it seems the market is transitioning towards a more sophisticated ESG process.

Since 2015, we’ve seen a great increase in demand in the ESG area as a whole in Bloomberg. There was 100% annualized growth in demand for this data, which is pretty much aligned with the market itself, in terms of the growth in ESG funds, sustainable asset management, green bond issuance, etc.

I manage the quality of our products. I come from a financial background, and the first time I opened a CSR report, I was in shock. Because the data is so sporadic, it can be reported in different formats and structures.

There are many gaps and an overall lack of ESG reporting. We want to see more targeted disclosure, more materiality level reporting. Not every company and not all ESG factors are material for every sector. So if, for instance, I am analyzing a mining company, I will probably want to see more about their waste management and emissions, whereas on data security I would look at Vodaphone or Facebook. These are some of the challenges we had regarding quality, and we expect and hope to have more targeted disclosure.

Question: Does Bloomberg face challenges regarding the reliability of data?

We also feel that we are not just analysts, but also auditors. With the reports, you want to see if it is representative enough, if it covers the entire assets of the companies. We have engagement with companies that ask us to verify their data. Usually, we overweigh companies have external auditors on their ESG reports, on their emission reports. There’s a high level of trust as well in the report, but we have a few layers of quality checks on the data before it is being disseminated to terminal users.

 

Elise Attal | Vigeo Eiris – main points

Elise Attal, Maala Conference 2018. Photo by: Netanel Tobias

Question: Relate to challenges regarding the quality of ESG data.

Vigeo Eiris are global providers of ESG data, analyzing companies’ performances, goals, practices, making sure that they manage the risks. As a data provider, we send data to investors and asset managers who want to identify which companies are the best performers. In today’s’ world, we are overwhelmed with data, and it’s a challenge as well to track this data and make it understandable for asset owners and companies.

It is important that the methodology be rigorous and exhaustive, that we are able to get more in-depth indicators. Different disclosure guidelines add difficulties to our methodology. There are several platforms such as SASB, the Global Reporting Initiative, integrated reporting and so on, to identify ways of reporting so that the data would be more comparable. It is our role as an ESG data provider and rating agency to pick that information, screen it, analyze, measure and compare it, and then come up with the data.

Question: What information regarding companies can investors receive from Vigeo Eiris?

At Vigeo Eiris, our stance regarding sustainable investment and CSR is that companies have to be accountable to their stakeholders and report and be transparent about their practices. In some cases, for example if we add additional voluntary questionnaires, we are criticized for over-burdening companies. Of course, companies don’t have to answer our questionnaires, they are able to choose from any agency that they believe in and the methodology that they believe is the most useful. We encourage companies to interact with us because it is important that they engage in dialogue with ESG rating agencies, as a way for them to improve their commitments toward CSR, to understand what investors are looking for, what type of data we collect, what is changing.

Materiality is changing as well. Stakeholders have different expectations in different parts of the world. The role of ESG rating agencies is to constantly reframe and renew the materiality assessment taking into account all the stakeholders’ perspective. Our methodology is renewed and characterized for each sector with materiality assessments.

The methodology is changing as well, to become more forward-looking. Investors are asking us to value the current behavior of companies, as well as their future behavior on certain issues, for instance: if will they be able to bring specific goods and services to the market that will contribute to the SDGs and have an impact; or whether the company will engage and be able to go ahead toward an energy transition. We are developing tools to asses SDG impact, through a global 3-dimensional approach, looking at impact, measuring and qualifying it.

Question: How do you evaluate the reliability of the data?

Reliability of data is a challenge. In the case of Volkswagen, for example, we had to downgrade their score because they had been lying on their reporting. We can’t check each company whether the data they provide is entirely accurate. There will always be some kind of a risk, but it is also our responsibility to be proactive and to monitor that daily. It’s all about trust, and for the investors as well, they have to trust that our data is accurate and validated.

 

Jeff Cohen | SASB – main points

Jeff Cohen, Maala Conference 2018. Photo by: Netanel Tobias

The Sustainability Accounting Standards Board (SASB) is an independent non-profit organization based on the belief that transparency breeds competition, and that competing along environmental, social and governance (ESG) factors that have a financially material outcome for a specific company in a sector will create not only positive financial results but also beneficial societal results. SASB is designed to solve challenges in creating consistency, comparability, and an explicit focus on financial materiality for the investor community.

SASB is not a data provider, but rather tries to create connecting points between the investment community and companies. These connecting points are not only to have more actionable and usable information for investors, that allows them to make more sophisticated investment decisions in public equities, in fixed income, and even in private markets, but also to help companies suffering from ESG questionnaire fatigue. The list of such companies keeps getting longer and longer. We work proactively with companies to identify the factors useful for them to incorporate into their strategic business decisions, and understand from an investor’s perspective how that information will be incorporated into their analysis.

SASB has developed a rigorous set with nearly a thousand metrics, covering 77 industries, but only 5-13 metrics per industry. Therefore SASB does not create an additional reporting burden on the companies, nor does it require to report on all of them. Instead, the approach is – you are a unique company, you’re an Israeli/American/Australian company, or you’re a small/medium/large-cap company, you should focus on the factors that most matter to your business. Therefore, we hope to aid the quality of data so that analysis groups can create more robust value-added services.

The existing questionnaires create a sort of bias because only very large or mega-cap organizations can accommodate all the required information. And even those groups who are strapped for resources, how do they prioritize what information they are going to report? This creates an asymmetry in information and value. Therefore, SASB focuses on what is critically important for the investment community and eliminate some of that bias from the marketplace.

 

Noga Levtzion Nadan | Greeneye and Value Square – main points

Noga Levtzion Nadan, Maala Conference 2018. Photo by: Sharone Amit

Question: How do you integrate data into your hedge fund?

After years of being on the side of research, this year we moved sides. The idea is to integrate ESG with financial issues. ESG is a good base, but you have to have integration with a good financial analysis. We have, for example, a product of portfolio management with Clarity Capital; another with IBI portfolio management. We bring the ESG analysis, they bring the financial analysis, and we integrate them.

Value Square is a new ESG hedge fund, with the idea that, when building a portfolio, we want to have ESG totally integrated; ESG is not built as an additional layer on the financial basis, rather it is the basis.

We take the companies that pass the SDG product from Vigeo Eiris, and only the companies that will be either positive or advanced positive – i.e. substantial impact, above average in ESG performance, and they don’t have critical controversies and controversial issues. This narrows down to a pool of companies at which we look at financially. We pick out the attractive ones, and then check specific ESG criteria that could have an influence on their market. For example, if a company’s main income originates in Africa, and we find a bribery issue that is not dealt with properly, we have to dive deeper and make sure it is integrated into the financial analysis as well.

Comment – Jeff Cohen: When thinking about ESG, many people fail to make the direct connection to very specific company financials, like contingent liabilities, cost of capital or expenses and revenue opportunities. That’s part of the reason why there needs to be, at least from SASB’s standpoint, an actual body of evidence that connects an ESG factor to a specific financial factor.

 

Question to all: How can Israeli companies attract ESG investors?

Dror: The first step is to start reporting. Afterward, we can proceed with more targeted reports. It is also very important to report in English.

Noga: With regard to reporting, I think English is a very crucial thing. According to the Israeli law, only the Hebrew version counts, in terms of obligation. One thing that Israeli companies need to understand, is that if they don’t report in English, half of what they do, even if they have it on the internet in Hebrew, isn’t counted in. Without English reporting, companies simply don’t pass the thresholds, they are not screened and not looked at; They are out of the picture.

Elise: Being more transparent and more accountable toward all stakeholders is a challenge for Israeli companies, but it’s a challenge globally as well. Companies have to constantly improve their reporting levels. We hope that someday companies will provide full disclosure on their ESG performance, providing their ESG scores alongside their credit rating agency scores. That will make the market more transparent, and will make a global push toward more ESG reporting.

Jeff: Ultimately, the point of reporting is to asses how the company is operating its business. It’s not enough to just communicate the information out. It’s very useful to incorporate the reports into an overall sustainable strategy. This can help make a company more viable and attractive to all stakeholders.