“Like Learning a New Language…” NICSA Presents a Rosetta Stone for Learning to Speak ESG

In June, NICSA held its latest event, focused on “ESG Essentials for Asset Managers & Advisors.” The discussion was robust and more than filled a two-hour window, led by moderator Hannah Glover, Managing Editor with Ignites, and featuring:

• John Farley, Vice President – Responsible Investment Strategy, Calvert Research & Management;
• Mark Hays, Vice President – Sustainable Investing, J.P. Morgan Asset Management;
• Mark McDivitt, Managing Director, Global Head of ESG, State Street;
• Todd Scorzafava, Partner in Charge of Wealth Management, Eagle Rock

According to Mark McDivitt, “Understanding ESG is like learning a new language; a narrative derived from the evolution of disclosure seeking greater transparency into the health of a company by quantifying non-traditional financial factors. It’s a discipline that has gained material traction globally over the past 18 months and is rapidly becoming an essential tool being incorporated into standard risk management practices.”

“Approximately 80% of balance sheets today are comprised of intangible assets such as Intellectual Property,” he added. “ESG factors are used to help better measure these 21st Century assets where investors are increasingly looking beyond standard P&L statements and digging deeper into a corporation’s governance practices, employee and client engagement as well as approaches towards environmental sustainability. To be clear, these are factors utilized to quantify the Value of a company, NOT to be misconstrued as an effort to highlight the Valuesof a company.” 

The panelists also all agreed that we are now well past the days of ESG being a niche approach, but pointed to ongoing needs for consistency in scoring and data, since one provider’s ESG “winner” can score poorly based on another’s metrics. Those inconsistencies point to an even larger issue when it comes to how many in finance and investing think about ESG. 

“Socially responsible investing (SRI) often gets conflated with ESG, and SRI is closely associated with the idea of negative screening, i.e. an approach that takes out what the investor doesn’t like or doesn’t agree with,” said John Farley of Calvert. “But in ESG, it’s not about negative screening; it’s about finding the factors that will impact companies and their performance and thinking of ways to act on that information, which can include engaging with management to help spur important changes that won’t just make a company more ESG-friendly but which can have a tangible, positive impact on performance.”

The panel agreed that there is no “perfect company” from an ESG perspective, so the question then becomes do investors divest from companies that score low or do you engage with those companies and try to help them improve? 

According to the panelists, engagement would seem to offer the better approach to building long-term opportunity.

This is part 1 of a 3-part series of posts from this latest NICSA ESG event. 

Part 2: The institutional view of ESG

Part 3: The intersection of ESG, Big Data and Artificial Intelligence

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the NICSA panel, they do not necessarily reflect the views of NICSA or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

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