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ESG nonconforming: There’s more than one way to identify good companies

Sustainable investing’s young guns don’t see rigid scoring or rating systems as the best way for ESG investors to have a real impact.

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With more cash than ever pouring into sustainable investments, ESG scores and ratings recently have come under scrutiny for lacking transparency. To which Thomas Kamei, who heads up sustainability research for Morgan Stanley’s Counterpoint Global team, says: Who needs ‘em?

"We don’t look at the ESG scores at all," Kamei told GreenBiz Executive Editor Joel Makower during the recent "ESG in 2021: The State of Play" webcast. Kamei added that there are funds, exchange traded funds (ETFs), for example, that consider these scores, "but that’s just not what we do. Our view is: Why don’t you just disclose things that are really material?"

Kamei, who made the Forbes 30 under 30 list in 2018, just might represent the next wave of sustainable investing, a generation not bound by the rigid thinking of their predecessors, a little more — fluid — in their views on ESG investing. 

Tessie Petion, also a guest on the webcast, joined Amazon as head of ESG engagement 11 months ago, after heading up HSBC America’s ESG research. She agreed, "There’s no one way to do this."

For example, she recalled having conversations at HSBC about how standards for best practices can vary depending on the market. Often emerging markets companies don’t meet U.S. or U.K. governance criteria, even when they’re really well-run companies, Petion said. She suggests that rather than trying to adhere to the standards of more developed markets, such companies might try telling investors a better story about how what they’re doing works well for them and all of their stakeholders.

"There are lots of different approaches," Petion said. "Especially when it comes to climate and social issues, we have to throw everything at the wall."

On the subject of disclosure, Kamei offered the example of software companies, which as immaterial emitters of greenhouse gases might do better to focus more time and effort on elevating disenfranchised voices, rather than "trying to track the Scope 3 emissions of their cafeteria or whatever."

Our view is: Why don’t you just disclose things that are really material?

He described a questionnaire that the Counterpoint Global investment team developed, comprised of 10 questions designed to gauge how sophisticated a company’s sustainability program is and how much agency its director has. Two of those questions: How many layers of reporting are there between the head of sustainability and the CEO? And, does the board have a dedicated sustainability committee?

Asking these questions helps the team sniff out attempts at greenwashing, he added. "[Greenwashing] is a real issue. Companies that put out this strong sustainability narrative, and then we go in there and talk to the company and realize they’ve totally under-invested in it, they don’t have a culture of adaptability, the sustainability officer doesn’t have agency, that’s a red flag for us. Because we believe that if consumers are smart and the internet is a transparency driving force, then eventually the truth gets out, and you can get cancelled."

Or maybe you’ll just get regulated.

The European Union agrees that ESG investing needs more transparency, and sweeping new regulations there require portfolio managers to disclose the potential harm their investments could do to the environment and society.

In the U.S., the Biden administration appears headed toward imposing similar rules, with the Securities and Exchange Commission already focused on climate-related disclosures by companies. These rules could change the way companies disclose information about everything from carbon emissions to diversity to worker’s pay. 

Such disclosures will help investors and consumers get at the truth about a company’s sustainability record. But being the best in class won’t necessarily catch Kamei’s eye.

"We think if we invest in a ‘laggard’ sustainability company and get in there and help them, that’s actually more net-impactful than just piling into the companies that are already good," he said.  

To sum up, broadening your thinking about what makes an impactful ESG investment, Boomer, just might spare you the label of "basic," aka a person who is unoriginal and follows only mainstream trends.

You’re welcome.

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