ESG Analyst for an Hour: Think like an Investor
- Linda-Eling Lee, Executive Director and Global Head of ESG Research, MSCI
- Laura Gitman, Managing Director, Advisory Services, BSR (Moderator)
MSCI, an environment, social and corporate-governance (ESG) research and ratings organization, uses two dimensions to rate companies: an assessment of the company’s exposure to ESG-related risks and its management capacity to mitigate such risks. Companies are evaluated as an industry set, and ratings are normalized by industry.
ESG analysts consider only a subset of corporate disclosures to be relevant information; anecdotes and other content, while valuable to some stakeholders, are less so to the ESG analyst community.
To improve engagement with ESG analysts, companies should consider reporting in one location their goals and key performance indicators (KPIs), year-over-year progress, and clear definitions of terms and relevant methodologies.
“There is an increasingly large swath of investors interested in how their investments might be impacted by ESG risks.” —Linda-Eling Lee, MSCI
“If your business is riskier, we need to see a lot more in terms of your management capabilities to feel that you have mitigated your risk level.” —Linda-Eling Lee, MSCI
“[ESG analysts] are taking a holistic view of your company. If you’re not internally aligning and making sure that all of your information sources work with one another, it’s a big red flag for analysts. How are you communicating with your analysts? Is your information consistent across sources?” —Laura Gitman, BSR
“We love the anecdotes in your CSR reports, but really they’re not that helpful for ESG risk analysis. We comb through them very fast.” — Linda-Eling Lee, MSCI
The session’s goal, according to Laura Gitman, was for participants to better understand what ESG analysts are looking for as they analyze companies and to equip participants to begin an internal conversation around what they might need to do differently to respond to and shape investor demand.
Linda-Eling Lee began by sharing some background information about MSCI, one of the largest providers of ESG information for the financial community. Lee leads a team of research analysts who produce ESG ratings and research for more than 5,000 companies and serves more than 800 clients with US$15 trillion in assets under management. These clients include large pension funds, sovereign funds, asset management funds, smaller socially responsible investors, and, increasingly, hedge funds and fixed-income managers.
MSCI works to help investors who have thousands of holdings to identify specific vulnerability in their portfolios, rather than provide a recommendation about a particular buying or selling decision. Companies are evaluated in a comparative process by industry, using the Global Industry Classification Standard (GICS).
To provide session participants with concrete experience in ESG analysis, Lee and Gitman divided attendees into three groups. Each group was provided with a set of information to analyze in order to assess the relative risk exposure of three gold-mining companies. Lee asked each team to work together using a range of data and information to answer the question, “Which company in my portfolio is more likely to experience a costly accident?”
Participants rapidly analyzed three types of data, including mine site location information, health and safety data, and strategy and policy excerpts related to health and safety management systems. After a few minutes of dialogue and debate in groups, each team shared their answer to Lee’s question, and Lee walked participants through MSCI’s analytical approach.
Their approach to ESG analysis has two components. First, they assess a company’s exposure to ESG-related risks, and second, they evaluate the management’s capacity to mitigate such risks. Level of exposure is determined by an analysis of the type, location, and size of operations, and management capacity is assessed through a review of policies and commitments, programs and initiatives, performance indicators, and controversies. The management capacity assessment is somewhat qualitative, according to Lee; however, MSCI has internal guidelines to ensure consistency in its assessment approach. Lee said, “MSCI tries to be as consistent and reliable as possible, meaning that it doesn’t matter which of our analysts does the rating, the rating should be the same.”
Regarding reporting guidance, a participant asked Lee, “How descriptive should we be in our reports as opposed to providing rapid-fire numbers?” Lee responded that it would be very helpful if companies would put their goals and key performance indicators (KPIs), as well as how they change from year to year, in a single place. She also suggested that clearly defining the data, such as whether your reported injury rates cover all of your operations or a subset, is valuable to ESG analysts.
Building on this commentary, Lee shared some challenges of ESG analysis. A key challenge is that information is not reported in a consistent format across companies. “Companies change their data reporting from year to year, and this is very difficult for us,” Lee remarked. Further, companies have different definitions of key terminology. “One company may define injury as a paper cut, and in another company you have to lose an arm for it to be considered an injury,” quipped Lee.
Another participant commented on the large volume of requests for information from ESG analysts and socially responsible investors, and asked Lee whether MSCI works with peers to develop common standards to improve reporting efficiency. Lee said that while MSCI supports and provides input to the various standard-setting bodies, their approach is not to ask companies for information. She said, “We do not put the onus on companies to send us information. Instead, we go out and collect it.”
Gitman closed the session by inviting Lee to share advice with the audience. Gitman asked, “What should companies do differently in terms of how they think about disclosure that could result in better evaluations from ESG analysts?” Lee emphasized that while corporate reporting and disclosure is generally targeted at a wide variety of stakeholders, only a subset of that information is considered relevant for the investment community. It is important for companies to also realize that the investment community is not always asking for the same things or focused on the same ESG issues.
November 5, 2014