Breakout A: New Lenses

BREAKOUT A: New Lenses

Rapporteur: Shams-il Arefin Islam


  • John Streur, CEO, Calvert


  • Linda-Eling Lee, Global Head of Research, MSCI

Do Corporate Controversies Help or Hurt Performance? A Study of Three Portfolio Strategies

  • ​Gretchen Goldman, Research Director, Union of Concerned Scientists

A Methodology for Assessment of Corporate Responsibility on Climate Change: A Case Study of the Fossil Fuel

  • Bill Davis, Managing Director, Stance Capital

Performance and Impact: Can ESG Equity Portfolios Generate Healthier Financial Returns?

Do Corporate Controversies Help or Hurt Performance?

Linda-Eling Lee, Global Head of Research, MSCI

Defining controversy: In this context/parlance, controversy is an allegation of a company that has negatively affected stakeholders through some sort of wrong doing. For example, A serious allegation can may be death and irreparable harm (E.g. Fukushima nuclear disaster, Japan, Deep Water Horizon oil, BP spill etc.) to minor instances such as store overtime charges.

ESG investing practices has 2 keystone areas of approach. First area is aligned with investor’s innate value sets and works by excluding companies whose behavior goes against the accepted set of norms. For e.g. tobacco, arms trading companies etc. Second strategy is to benefit a portfolio (medium-long term), risks by using ESG factors which impact risk. There are 3 main ethos that seem to take precedence when deciding which companies to exclude: ethical, reputational, and performance related risks. The data is collated from government, NGO, and media data bases. This enables an ability to put together a good global picture.

Some companies are better at mitigating controversial situations because of their media and extensive CSR activities which buys insurance against diminishing public opinion. However, it was interesting to note that smaller companies do not get penalized as much as larger ones. It is important to note that exclusions are considered to be a “blunt instrument.” In fact, a company’s returns were not always affected by severe negative stakeholder impacts.

In terms of investors, if they are looking to protect reputation, excluding worst offenders is a critical starting point. On the other hand, investors looking to reduce financial risks, excluding corporate wrongdoers is considered to be too blunt. A better collective overview of the risk management is a better approach to capture financial impacts. A final point made was that controversies made investors base their decisions on ethical considerations rather than financial.

A Methodology for Assessment of Corporate Responsibility on Climate Change: A Case Study of the Fossil Fuel

Gretchen Goldman, Research Director, Union of Concerned Scientists 

Investors are calling for better metrics on ESG data. Previous metrics and systems were too broad in scope which had too many ESGs or even limiting in nature (scope). Since investors want global long term financial stability, a new system is proposed. Thus, this research shows and encourages climate based science and policy initiatives to be incorporated within the metrics. It is designed to build on existing CSR using 30 indicators in 4 areas. These areas are: 1. Abdicate wrong information on climate science and policy, 2. Plan for a carbon reducing economic system, 3. Support fair climate policies, and 4. disclose climate related risks.

Discussion points(First, this research was concluded without any corporate or government funding). A lot of climate related risks such as sea level rise, stronger hurricanes coupled with regulatory challenges imposes a serious risk for companies. The study successfully assessed 8 fossil fuel energy companies using 30 indicators (given in the paper). It was found that when assessed, these energy companies “did not meet expectations laid out by this metric…indicating the potential for improvement across the fossil energy industry…” 8 actions were recommended to improve climate responsibility. One of them was to fully disclose the financial and physical risks climate poses to their businesses. Moreover, fossil fuel industry has a critical issue, they are more politically active and they also face reputational risk, and can lose public trust which in turn are risks that investors react to. 2016 was the costliest for natural disasters in record. 2017 will be costlier, global financial risks are at risk in trillions of dollars and so how will this effect the future of ESG data? Investors demand climate disclosure and thus must be included in financial records. finally, it is important that companies undertake the metrics presented in the paper as a starting point of moving forward and “substantially improve future iterations of this study…”

Performance and Impact: Can ESG Equity Portfolios Generate Healthier Financial Returns?

Bill Davis, Managing Director, Stance Capital

Critical issue is that many investors are not instilling ESG data into their portfolios and thus it can be said that it is not exactly sought after. The reason this is so is because of the quality of the data, and potential compromise of the data provided. Moreover, it is not yet known how much of an effect would integration of ESG data have on the returns both medium and long term. However, with proper portfolios “investors can align their capital with their values, around ESG, gender, faith etc.”

Discussion points: Short term performance metrics is an issue and that we have not found a performance edge on ESG. We also learn that its innate value is poorly understood and positioned against other factors. The reason is that ESG data quality is a problem. Important question to consider is that If you are a portfolio manager, do you wait for that quality data? Or do we need to work with what we have? Also, very critical is that current ESG data usefulness is not well marketed and thus, it plays in the hands of its detractors. However, it is important to note that ESG investment portfolios is rising and that the data quality will only get better and more important in investment decisions. However, it is not yet 100 percent clear that ESG data will provide an instant performance edge. A point made during the presentation was that S& P index holdings creates 4 times the carbon of everything else we do.