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How subjective is ESG data?

In a recent National Post comment piece, the tax expert and Imperial Oil board member, Jack Mintz, states that ESG factors cannot be standardized and are inherently subjective. This is a comment that is regularly shared by certain mainstream ESG skeptics.

There is no doubt that evaluating ESG factors across companies is difficult. We would also say that the lack of standardization can provide an edge because as we dig for info we can distinguish firms through this nuance and catch information that even the big ESG research firms miss. But there is an existing and growing set of ESG factors that are standardized and an impressive number of Canadian and international initiatives to further the development of comparable and standardized ESG metrics.

Let us start with what is already standardized. Honeytree and many other ESG managers rely on the fact that there is a massive amount of available and consistent and comparable corporate ESG disclosure aligned with the Global Reporting Initiative (launched in 2000). All the companies we hold and monitor report 5-year histories of their environmental and workforce data.

While voluntary, currently, more than 80% of the world’s largest corporations use the GRI standards and 85% of S&P 500 Index companies publish sustainability reports. Companies of all sizes are increasingly integrating ESG and financial data and third-party assurance of ESG data continues to grow. The number publishing fully audited GRI reports has also increased rapidly.

Honeytree relies on the fact that companies report things like carbon emissions, emissions per unit of production, lost-time injury rates, executive compensation, workforce composition and turnover, fines paid for environmental contamination, and lawsuits related to breaches of human rights. Companies face the same problems standardizing these data points that they do for financlials - but that is why we have processes and auditors.

At the same time, there are an impressive number of initiatives that are seeking to improve and mandate harmonized ESG disclosure which Honeytree will benefit from. In Canada, there is the Sustainable Finance Action Council, a federal initiative that has, as part of its mandate, developed standardized and mandated climate-related financial disclosures. Today, EU rules on ESG reporting currently apply to large public companies with more than 500 employees. This covers approximately 11,700 large companies and groups across the EU and will soon expand to 49,000 entities. The United States securities regulator, the SEC, is also looking to mandate certain standardized ESG disclosure going far beyond Europe especially in the area of diversity.

Is evaluating ESG metrics alongside traditional financial metrics difficult when complete and perfect disclosure has not been achieved? Of course. But if your investment manager is not doing their best to marshal all available performance metrics in securities selection, they might be missing a lot of useful data.


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