Advocates of environmental, social and governance investing are urging the SEC to step in and require more disclosures that would help standardize the reporting of data relevant to making ESG-related investment decisions.

Without better data, financial advisors might not be able to provide ESG-minded clients the strategies they desire.

Asset management companies that use ESG investing criteria, researchers and academics told the SEC’s Investor Advisory Council last week that not many companies voluntarily disclose enough materially-relevant ESG data.

Jessica Milano, director of ESG investment research at Calvert Research and Management, said around 85% of the S&P 500 companies voluntarily disclose ESG-related data but they aren’t always relevant to researchers, asset managers, advisors and investors conducting due diligence or making investment decisions. Calvert, which had $17.8 billion in AUM as of July, incorporates ESG criteria in all its investment decisions.

Speaking at the meeting, SEC Chairman Jay Clayton said the “key points of interest” for him in considering ESG-related disclosures are what data companies use to make business decisions and what data investors use to make investment decisions.

Clayton acknowledged that those two questions “can lead to complex answers” because not all companies in the same sector use the same or comparable data in their decision-making and investor analysis also varies.

“In the areas of E and S and G, in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames,” he said.

Patchy information

Jonathan Bailey, head of ESG investing at Neuberger Berman, spoke about the value of having deeper data sets and broader sources of information. Around 60% of Neuberger Berman’s $304 billion in AUM integrates ESG factors in portfolio construction and security analysis.

“The more info that we have, the better that we are positioned to evaluate the company,” Bailey said, adding that having “multiple sources” of data is valuable.

Bailey said Neuberger Berman factors in ESG criteria when valuing companies it adds to its portfolios “even if the word sustainable is not on the fund” because the firm believes “those factors affect risk and return.”

“We believe [ESG criteria is] adding value to our investment process, and that’s part of the reason why we incorporate it,” he said.

Bailey said Neuberger Berman factors in ESG criteria in a way that’s most relevant to a particular investor.

“Two portfolio managers at our own firm may have different views of the same ESG issuer,” he said. “What’s important is we represent the specific interest of a specific client in the ESG strategy.”

Because there isn’t enough relevant ESG data, tailoring the evaluation of the data is challenging, according to Bailey.

“At the present time, this is an imprecise task because of the patchy level of information [among] companies,” he said.

Bailey laments the “greenwashing that exists,” whereby companies use public relations and marketing to promote the perception of being ESG-responsible.

“We believe that companies are using too much money for that,” he said. “It’s a waste of shareholder capital.”

Bailey said having “greater disclosure” of “financially material” ESG-related data will be better for investors and the capital markets.

“We don’t think it’s unreasonable for regulators” to step in and require greater disclosure, he said.

Taking matters in their own hands

Rakhi Kumar, senior managing director and head of ESG investments and asset stewardship at State Street Global Advisors, said what is needed is “high-quality, financially-material, consistently-reported and commonly-accepted” ESG-related data. Out of SSGA’s $2.8 trillion in AUM, more than $200 billion is in ESG investments, according to Kumar.

Kumar noted that SSGA developed the so-called "R-Factor" to address the lack of transparency in ESG reporting and scoring.

R-Factor leverages multiple data sources and aligns them with widely-accepted, transparent materiality frameworks to generate a unique ESG score for listed companies.

R-Factor measures the performance of a company’s business operations and governance as it relates to financially-material ESG challenges facing the company’s industry. It is designed to provide companies a roadmap to improve ESG practices and disclosures and to help create sustainable capital markets.

Calvert’s Milano cautioned against having “boilerplate ESG disclosure,” however, because it will not be useful when conducting thorough due diligence research.

“As more companies disclose ESG [information], the value depends on its usefulness,” she said.

Satyajit Bose, associate director and associate professor of the Program in Sustainability Management at Columbia University, said any attempt to standardize ESG reporting should “prioritize areas where there would be easiest consensus.”

J.W. Verret, a member of the SEC’s IAC and an associate professor of law at the Antonin Scalia Law School of George Mason University, said it would have been better for the purpose of the group’s discussion to have people critical of ESG to speak up at the meeting.

“Skeptics of ESG have argued quite forcefully that people who run with ESG are advisors and pensions that are using captive capital to pursue it, so they might be violating some state requirements,” he said.

When it comes to requiring more disclosures, Verret said the matter should be studied more carefully.

“We should also be mindful of the fact that disclosures can be counter-productive and harmful,” he said. “They could increase the regulation and litigation risk a company faces.”