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The key figures of ESG investing

Published on 31/08/2022

When you are looking at the environmental or social impact of a company you might want to invest in, it can be a minefield. First, you need to consider your personal values - does it align with your beliefs? And then - perhaps more perplexing - you have to consider the data.

So what data do you look at, and what is important? Here are some suggestions to get you started:

Environmental

The ‘E’ in ESG covers all things environmental and therefore you’d be looking at a company’s current eco-friendly rating and future goals to combat climate change, this includes pollution, water waste, deforestation, energy efficiency and waste management.

One of the key figures to look at here - if reported - is a company’s carbon footprint. This includes all emissions that are influenced by the decisions it makes. This means that as well as the direct emissions (company cars, manufacturing emissions etc.), indirect emissions are also included. Indirect emissions include the entire chain, from creation to development, through to delivery.

Another thing you could consider is green versus brown revenue. Green revenue is defined as the total or percentage of sales that come from environmentally sustainable solutions, ones which avoid emissions.

Brown revenue is the proportion of revenue that comes from activities related to the extraction of fossil fuels, or power generation using fossil fuel-based energy sources. It reflects firms tied to the conventional energy value chains.

Social

The ‘S’ in ESG covers all things social so would include a company’s labour standards, staff gender and diversity statistics, community relations, policies around industrial accidents, employee engagement, data protection and customer satisfaction.

Human rights fit into this category too and have broad coverage. It includes the 30 human rights listed in the 1948 Universal Declaration of Human Rights. These include the right to life, freedom and security, the right to equality before the law, the prohibition of torture and slavery, the prohibition of forced labour, and the prohibition of discrimination.

Human rights also include what is laid down in the Convention on Civil and Political Rights and in the International Covenant on Economic, Social and Cultural Rights.

Finally, nine UN treaties are also relevant, which cover, amongst other things, the rights of children, the prohibition of discrimination against women and the rights of migrant workers.

Governance

The ‘G’ in ESG stands for governance, essentially how the company is governed, and therefore includes the company’s track record on bribery and corruption, political contributions, lobbying, whistleblowing schemes and board composition and diversity.

Boards oversee the key activities and set the strategy for a company, and their work has a deep impact on the community and environment in which the company operates. Therefore, boards should be diverse - with a mix of skills, experience, outlooks as well as race and gender. Research suggests that a healthy balance of perspectives produces greater outcomes.

So, where can you get this data?

Unfortunately, there is no standard for reporting ESG data, and much of it is not free or publicly available, instead hidden behind paywalls. More often than not, ESG data is self-published and reported voluntarily. But that’s no reason to be despondent!

Firstly, a great source of publicly available ESG information can be found on the MSCI website. Here you can search any listed company and find out their ESG rating. Dive into the detail and find out what they are currently doing and working towards.

The metrics that MSCI use are available so you can confirm if their methodology aligns with yours, and so you can do your own research from there.

Another good source of information is the companies themselves - head to their websites, check their board composition, their customer ratings, their policies and procedures and their pledges. Take a look at the companies they team with, their delivery partners, and their staff databases on LinkedIn. Go to their social media pages, look for customer reviews, content and comments.

And finally, most banks include respect for human rights in their ESG policies and due diligence processes. For example, if a manufacturer applies for a loan from a bank, it currently stands no chance of getting that loan if child labour occurs in the supply chain, or if an essential raw material needed for production is found to have been mined with forced labour in an area controlled by armed militias.

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