Environmental, social, and governance research has become a key method for advising investors where to put their money, especially when it comes to corporate investment. The field of ESG research and analysis took off in 2005 when a landmark study entitled “Who Cares, Wins” catalyzed the movement.
The report made recommendations for the financial industry to better integrate environmental, social and governance issues in their overall analysis and asset management. The report made the case (and in a timely manner considering the abuse of corporate power that became problematic throughout the early 2000s) that embedding these three factors in business dealings was not just part of fiduciary responsibility, it was also good for society as a whole.
Today, ESG investing is estimated to account for over 20 trillion dollars worth of assets under management (AUM). The field has caught on, and becoming an ESG Analyst or consultant has become a lucrative profession. But being an ESG researcher is not easy persay, as the nuanced methods used to extract information from corporate finances can be less than ideal.
What are the intricacies of ESG analysis?
Specifically, ESG for corporations is important because when advising investor decisions in a corporate setting, there is usually a lot at stake in terms of financing and supply chains. The major research categories that should be presented to investors are:
1. How a company builds and fosters innovation over a set period of time
2. How a company manages its supply chains
3. How a company treats their workers
4. How a company responds to climate change (or goes about developing some type of response to do so)
ESG researchers and analysts need to be able to forecast and make scenario predictions when it comes to the environmental component. Investors will want to see reports that forecast annual footprints over a one or two year period. Understanding how to graph and model these predictions is a prerequisite for researchers in this field.
Moreover, researchers in the ESG field should be versed in statistics and normal distribution in order to understand what the upper limits are for companies in terms of pollution and emissions relative to other industry leaders. ESG researchers or analysts also need to be able to break down this information and synthesize it—to the likes of a literature review.
As mentioned, it will rarely be the case that corporations are 100 percent sustainable or have reached carbon neutrality, but as a researcher in this field it is important to pull in multiple dimensions of a companies portfolio to paint a clear picture of where exactly investors are putting their money.
The Social Component
Major corporations are not just graded on how respectful they are to employees in an office setting. They are graded on more serious, societal topics like human rights and how they treat employees that work in tough conditions. For example, the apparel industry has many problems with regard to ESG because the social component that encompasses human rights has historically gotten low ratings. Nordstrom, and Ralph Lauren, being two majors players in this industry tend to score pretty low in terms worker empowerment and well being.
Another category of social grievances is the “Response to Serious Allegations” component in which ESG researchers need to collect data, either first or second hand to see which companies have had serious complaints or problems with their staff and how these instances were handled.
Starbucks, somewhat surprisingly, ranks dead last when it comes to handling issues of responding to serious allegations. It is the job of an ESG researcher to make sure these qualitative findings get reported to impact investors so they have a better idea of how to make impactful investments in the short and long term.
The Environmental Component
Understanding how a company is creating, managing, or seeking to minimize their environmental footprint can be complex. This is because supply chains tend to hide total amounts of emissions being produced on behalf of an organizations business model.
For example, it is very difficult for any corporation to have zero emitting behaviors especially if they are providing goods to far away places. This is because the transport and shipping sector is a huge producer of greenhouse gas emissions. Thus an ESG analyst needs to understand well the nature of an organizations logistics, their shipping routes, the length of their shipping routes, and the frequency of products that are shipped. Having a background in GIS—Geographic Information Systems will help on this front.
Amazon, for example, does not have a high ESG ranking in many reports because even if they do have good corporate governance and strong team leaders, they are weighed down by their environmental footprint of shipping fleets all across the globe. This is of course not to mention all of the plastic waste that is generated from a plethora of packages.