The problem with ESG scoring

The process of environmental, social, and corporate governance (ESG) reporting has become a pain point for many financial professionals, Shari Littan, director of corporate reporting research and policy at the Institute of Management Accountants, told me in May, based on her research.

In fact, an agricultural company (which Littan did not name) received demerits on ESG ratings because of lack of disclosure on deforestation and animal rights, she said. But that’s irrelevant as the company operates plant-based farmland, so factors like water use “is a very big issue from them,” she said. “Knowing that investors were looking at this rating, they had to take specific efforts to get the data aggregator to consider their individual business model,” Littan said.

There’s an urgent need to meet ESG criteria. But, “we can’t just make it into a check the box exercise,” Michaela Edwards, partner at Capricorn Investment Group, said during Fortune Connect’s virtual summit on Tuesday. One reason is the pitfalls of ESG scores.

“People may actually be surprised to hear that between two of the top vendors of ESG data, there’s only 32% of correlation of their ESG scoring,” Edwards said. Raw data and information on ESG are “just so ignored and uncovered,” she said. “And I think it’s a huge opportunity for us to learn more and collaborate across government institutions, but also data providers and investment allocators,” Edwards said. 

The theme of Fortune’s event was radical collaboration, which can include sharing best practices in ESG, said Edwards and Carrie Freeman, co-CEO at SecondMuse, an innovation and impact company focused on building inclusive economies. But that may require “coming at it from a place of solving things, versus a place of competition and contention,” which exists in the business world, Freeman said. “We fundamentally believe that relationship is really at the core of changing systems,” she said. 

In recent years, the call for sustainable investing and purposeful corporate strategies has been growing. “I would say that one of the benefits of the impact space is that there is a positive attitude towards collaboration and sharing ideas because this is truly a problem and an investment opportunity that is big enough for everyone to participate in,” Edwards said.

But what if gaps exist among different industries when trying to collaborate and build relationships around ESG? Bridging the gap may come down to a shared desire to earn capital, Edwards said. 

“If we’re thinking about the capital markets, specifically, and we think about 2020 alone, the market cap of clean technology companies increased by nearly a trillion dollars,” while the market cap of oil and gas companies declined by the billions, she said. 

Some investors are looking for a financial return and “may not necessarily buy into the impact angle,” Edwards explained. “And there are other investors saying you can have impact and you can have financial returns. So, I tend to bring both hats to the table.” If the intention is solely financial, “it’s still capital moving in the right direction, and you need to be able to bridge those conversations for the greater good,” she said. 

It’s “critical” for “everyone to be open and authentic [about] their expectations and needs going into these types of collaborative opportunities,” Freeman said. Beyond financial returns, impact returns should be taken into consideration and aligning with corporate objectives, she said. 

Humans are at the core of any system change, which makes collaboration important, Freeman said. “So, no matter how amazing an innovation is, or an investment opportunity, at the end of the day, you have a human behind it that is making decisions,” she said.

---

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

****

Fortune’s CFO Collaborative in partnership with Workday, “The Promise and Pressure of ESG Measures,” takes place on Wednesday, August 11. The event, created just for CFOs, will feature Brian T. Moynihan, chairman and CEO, Bank of America; Claus Aagaard, CFO, Mars Inc.; Ann Dennison, CFO, Nasdaq; Giulia Siccardo, associate partner, McKinsey & Company; and Emma Stewart, sustainability officer, Netflix. CFOs can join their peers in learning more about embracing ESG while attracting new investors and cutting borrowing costs and operating expenses. CFOs can apply here. For more information, email CFOCollaborative@Fortune.com.

Big deal

Accenture's 2021 Global Risk Management Study examines how risk management professionals are responding to business risk accelerated by the challenges of the pandemic. The majority (77%) of risk leaders said new risks are emerging at a more rapid pace than ever before. And at a time of digital transformation, many risk teams said they are not fully capable of assessing risks associated with acquiring more advanced technologies. The data is based on a survey of 700 risk professionals from industries including banking, capital markets, communication and media, energy, and insurance.

Courtesy of Accenture

Going deeper

Americans increasingly think major tech companies need more government regulation, a new Pew Research Center report found. About 68% surveyed believe tech firms have too much power and influence in the economy. Meanwhile, 56% of respondents said major tech companies should be regulated more, up from 47% in June 2020. "Lawmakers are considering antitrust legislation to weaken major tech companies’ dominance of their markets," according to Pew.

Leaderboard

Marcel Konrad was named CFO at Medexus Pharmaceuticals Inc., effective immediately. Konrad brings over 20 years of experience. He joins the company from CareDx, Inc., a precision medicine solutions company, where he served as SVP of finance and accounting and VP, corporate controller since 2018, and also served as acting CFO for a period of time in 2021. Konrad succeeds Roland Boivin, who is stepping down.

Quyen Nguyen-Haelle was named CFO at Medecision, a provider of integrated health analytics and software. Prior to rejoining Medecision, Nguyen-Haelle served as VP at Tandigm, a population health services company, where she was responsible for business performance and financial planning and analysis.

Overheard

"I think over the next 30 days it goes back up again…Two hurricanes, back to back, and next thing you know it’s over $600. That’s okay, though—the market is fine with that; it’s $1,000 wood the market isn’t okay with."

—Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform, on the lumber bubble bursting, as reported by Fortune.