Month: September 2019

Innovation in Stock Exchanges: Driving ESG Disclosure and Performance

In their recent article these authors discuss how stock exchanges are in a unique position to promote ESG transparency and leverage their institutional capacity to build more sustainable capital markets. To facilitate the quick uptake of material ESG disclosure and raise the quality and comparability of the data, the Athens Stock Exchange has created ESG guidelines for listed companies that will be published in the summer of 2019.

One important feature of the guidelines is their degree of sectoral specificity and emphasis on materiality. The guidelines and supporting metrics they propose are based on reporting practices endorsed by international sustainability standards like the SASB’s industry standards. This materiality-oriented approach will help issuers focus on the sustainability value drivers inherent in their business, and so ensure that corporate ESG disclosures satisfy the demand of investors for comparable quantitative and accounting metrics that help companies communicate their commitment to long-term value creation.

Authored by Tania Bizoumi, Socrates Lazaridis and Natassa Stamou

Social Capital, Trust, and Corporate Performance: How CSR Helped Companies During the Financial Crisis (and Why It Can Keep Helping Them)

The authors summarize the findings of their study, published recently in the Journal of Finance, that shows that CSR investments can help companies when they perhaps need it most—that is, during sharp downturns when overall trust in companies and markets declines.

Companies with high-CSR rankings experienced stock returns that were five to seven percentage points higher than their low-CSR counterparts during the 2008-2009 financial crisis, and even larger excess returns during the Enron crisis of 2001-2003.  High-CSR companies during the crisis also reported better operating performance, higher growth, higher employee productivity, and greater access to debt markets—while continuing to generate higher shareholder returns as late as the end of 2013. Many of these operating improvements continued well into the post-crisis period, though at more modest levels.

As the authors view their findings, the “social capital” built up by corporate CSR programs complements effective financial capital management in increasing shareholder wealth mainly by limiting companies’ downside risk.  CSR is seen as not only reducing systematic as well as firm-specific risk, but as also providing protection against overall “loss of trust.” The social capital created by CSR programs is said to provide a kind of insurance policy that pays off when investors and the overall economy face a severe crisis of confidence.

Authored by Karl Lins, Henri Servaes, and Ane Tamayo

Four Things No One Will Tell You About ESG Data

As the ESG finance field and the use of ESG data in investment decision-making continue to grow, our authors seek to shed light on several important aspects of ESG measurement and data. This article is intended to provide a useful guide for the rapidly rising number of people entering the field. The authors focus on the following:

    1. The sheer variety, and inconsistency, of the data and measures, and of how companies report them.  Listing more than 20 different ways companies report their employee health and safety data, the authors show how such inconsistencies lead to significantly different results when looking at the same group of companies.
    2. “Benchmarking,” or how data providers define companies’ peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market-wide inconsistencies and undermines their reliability.
    3. The differences in the imputation methods used by ESG researchers and analysts to deal with vast “data gaps” that span ranges of companies and time periods for different ESG metrics can cause large “disagreements” among the providers, with different gap-filling approaches leading to big discrepancies.
    4. The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for “a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.”

What can be done to address these problems with ESG data? Companies should “take control of the ESG data narrative” by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should “customize” their metrics to some extent, while at the same time seeking to self-regulate by reaching agreement with industry peers on a “reasonable baseline” of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.

Authored by Sakis Kotsantonis and George Serafeim