In our 2022 Perpetua 3rd Annual Stewardship Report, released in 2023, we highlighted the conundrum faced by the assetmanagement industry in substantiating and quantitatively attributing that ESG strategies can and do provide long-termvalue. The most prominent reason for this, we noted previously, is the current lack of widely consistent and reliabledatasets. In this article we provide more insight into the data dilemmas, by identifying seven current challenges investorstypically face when using ESG metrics and data.
1. Inconsistency:
This exists in two ways:
- A company might be inconsistent in and vary how they report each year, as the metrics disclosedwill change or the manner of disclosure changes. We have also found the scope covered fromyear to year can also change – for example, in one year the measurement of carbon emissionsmight cover 70% of operations, and then the next year it covers 80% of operations. This makes itchallenging to track progress in a comparable manner from year-to-year.
- Inconsistency across different companies. For example, there are more than 20 different wayscompanies report their employee health and safety data. This can lead to significantly differentresults when looking at a similar group of companies.
2. Lack of comparability
Even if the same data point is used by different companies, such as the “fatality rate” used by mining companies, often the rates will be reported differently. For example, some have fatal injury frequency rate per 1000 employees, while other companies have fatal injury frequency rate per million hours worked. This means the same metric is therefore not directly comparable between companies.
3. Inefficiency
ESG data for a company may be spread out between many different reports. A company may goabove and beyond to provide detailed metrics for the users of these reports, but efficiently locatingthe data can be a tedious and time-consuming task.
4. Complexity
Certain metrics, such as scope 3 emissions, are highly complex to measure. There are often delays in measuring them. Improvements in measuring emissions over time also cause incomparability from year to year. For example, Sasol outlines in their climate report, measures that they have been undertaking to strengthen the robustness of scope 3 accounting – a signal that the current reported metrics may not adequately reflect the true emissions.
5. Lack of annual disclosure
With matters like Corporate Social Responsibility (CSR) spend, some companies do not disclose how much they spend on an annual basis. Instead, companies state comments such as “over the last decade we have contributed x amount on CSR spend”. This is undoubtedly challenging if one wants to track annual spend versus annualised earnings.
6. Accuracy
A prominent example of challenges with accurate disclosure would be directors classified by the company as independent while their true independence could actually be deemed as questionable, if one looks at for example their relationship with the company historically; related-party transactions or extensive tenure on the board. Therefore, in this example, the reported percentage of independent directors to total directors would need to be read with some caution.
7. Lack of transparency
Data providers use benchmarking or peer analysis which typically determines how to performancerank a company within a sector. The lack of transparency among data providers about peer groupcomponents and observed ranges for ESG metrics creates market-wide inconsistencies andundermines their reliability. This is not sufficiently flagged by those investors who rely on this data.
ESG reporting is still relatively new in comparison to, for instance, financial reporting. As such, we expect the challengesabove to diminish over time as companies adopt more standardised disclosure as is being advocated by leading reportinginstitutions.