Our meetings over the last couple of weeks confirm several developments within the ESG investing world, all of which have been the focuses of our prior work. The first is a very significant step up in ESG oversight among most fund managers, with dedicated ESG teams at many companies scrutinizing sustainability reports and other releases, looking for red flags either from inconsistencies in reporting or from departures from the fund managers standards. Second, there remains a lack of real empirical analysis that allows for accurate comparisons between companies and this stems from the fuzzy reporting frameworks that we have today and the lack of clear and actionable guidance from regulators. As we have discussed several times, the huge inflows into ESG funds and the proportion of overall funds market that now has a “social impact” overlay could lead to real disruptions and some rapid valuation changes if and when the regulators provide tighter guidance on both corporate reporting and fund labeling.
As the Univar and Eastman pictures show, it is now becoming almost mandatory to show your ESG badges in your quarterly earnings. The challenge for investors is the interpretation of the data presented. If there is no real consistency to the format, then it will be difficult to compare progress and this is one of the challenges that the SEC hopes to guide on by year-end – something we covered in last week’s ESG and Climate report.
Source: Eastman Chemical 2Q21 Earnings Release Presentation, August 2021
For example, the Univar claim that it has improved external ratings may be a function of better dialogue with the rating companies, or more consistent reporting of data and may not reflect any positive change at the company. Given the complexity of understanding environmental footprints at many of the industrial companies, including chemical manufacturing and distribution, it may not be much of a challenge to persuade any of the ESG rating agencies today that you are doing a better job than they have modeled, as they are unlikely to have the skills and experience to question you.