ESG: The Latest and Greatest of Investment Strategy?
Updated: Apr 3, 2020
by: Jennifer Devine, Analyst - Consumer Staples
This Fall the Skyhawk Investment Group had the privilege to hold our August workshop in New York City. At each of our stops we learned valuable information on careers in finance as well as the state of the economy. It was evident that one topic kept coming up: ESG and its increasing presence in investment strategy. However, it was clear that there is still a lot of grey area involved in ESG investing. In short, ESG encapsulates three measurements; environmental, social, and governance. These measure sustainability and the ethical impact of a business entity. These factors are now being used more frequently to make investment decisions.
Our first stop was the Nasdaq office in Times Square. There we spoke to Ed Ditmire, the VP of investor relations, about their proxy statement as well as their implementation of ESG. In fact, Nasdaq recently released their own ESG reporting guide in May of this year. This reporting guide was initially created for their Nordic and Baltic markets; however, a new version was released to help private and public companies with ESG disclosure. Although companies that are listed with Nasdaq are not required to use this reporting guide, it’s a useful tool that provides transparency to investors. Reporting provides investors with information about how companies compare to each other in terms of environmental, social, and government factors.ESG ratings can be obtained from several other sources as well; Yahoo Finance, Sustainalytics, Bloomberg, and MSCI to name a few. Many firms use these sources as well as hire their own ESG research teams to screen investments. Another option is to create a guide, as Nasdaq has done, for scoring standards rather than relying on scores from other sources. ESG scores not only help investors make decisions, but they help companies visualize their score against competitors in order to make long-term improvements.
Sustainable investing is a great way to generate returns on investment while having a positive impact, but there are still imperfections in the U.S. in terms of regulation. While discussing the topic of ESG with Ed, it was noted that many companies are unaware of what to disclose when it comes to ESG. There are currently no laws in the United States that define ESG disclosure or how to compare companies when it comes to sustainability. This raises red flags because companies may be manipulating their reports or leaving important information out of the public eye. One of Ed's colleagues noted that their ESG guide can be used to help companies with disclosure policy. Their Global ESG Reporting Guide was originally intended for Nasdaq's Nordic and Baltic markets; however, it has evolved into a model that can be used globally to navigate the standards on ESG disclosure. Nasdaq-listed companies are beginning to use the reporting guide service in order to disclose the correct information and operate more sustainably.
Sustainability is also something that young people are looking for when applying for jobs. With the evolution of sustainable investing comes not only investment opportunities but job opportunities as well. Thousands of "ESG Analyst" jobs have been created since sustainable investing took off in 2014 and the market continues to grow rapidly. Technology and the need for transparency are constantly growing and are not going to stop soon.
As the trip went on, we made sure to ask everyone’s opinion on the topic of ESG. The consensus is that ESG is on the rise and will not be going away anytime soon. The main concern is whether ESG is being used correctly and whether more regulation will be introduced as it grows. There is still no "correct" way to investing using ESG standards in the United States. Companies are scrambling to figure out what needs to be disclosed and investors are unsure about where to find accurate ESG data. As mentioned, there are multiple sources where data can be found and there are different metrics and guidelines for each source. Throughout the August workshop we heard a lot on the topic, and it will be interesting to see how ESG evolves in the United States in the coming years.
Kell, Georg. “The Remarkable Rise Of ESG.” Forbes, Forbes Magazine, 31 July 2018, www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/#589829bf1695.