Shadows and Substance

Where can we get good information on corporate sustainability?

Illustration: Milo Winter, 1919. Public Domain. Source: Fables of Aesop.

When it comes to financial analysis, most investors use a combination of quantitative and qualitative information, based on market reporting and financial disclosures: price, volume, 10-Ks, earnings calls, and so forth. With so much available over the internet, it’s never been easier to compare Apple’s results to those of Huawei Technologies, the Chinese smart-phone maker. Both companies are multi-billion dollar enterprises employing hundreds of thousands of workers, but now we don’t have to travel to Shenzhen to listen to Huawei’s earnings call, or learn Mandarin Chinese. We can just download a transcript.

When it comes environmental, social, or governance (ESG) issues, however, it’s often hard to find relevant information. Investors want and need to know whether potential regulations on carbon use or toxic chemicals or board diversity will affect their companies’ fortunes, but it’s really difficult to get hard data. Most corporate disclosures around these topics consists of generic, boilerplate statements of “commitment to the environment” or “our people are our greatest resource.”

This sort of information is worse than useless. It’s often designed to game a consultant’s ESG scoring system, rather than convey material, actionable data. Imagine if Apple’s annual statement consisted of nothing more than, “Sales were down last year for a number of reasons – but we’re still committed to our products.” It would be impossible for analysts to determine a fair price—not without clear, quantitative information.

We’re in this sort of situation now regarding ESG disclosure. Environmental, Social, and Governance factors are reported separately from mainstream financial statements. And there is little or no standardization. When we try to integrate them into our analyses, we risk confusing the form with the substance of sustainable business practices.

Investors need to demand standardized ESG disclosure—through formal and informal means. I’d love to hear a high-profile analyst ask about ESG metrics on one of Exxon-Mobil’s earnings calls. The FASB provides clear guidance on how to depreciate software and capitalize contract expenses. Is too much for them to provide direction on how to report water use?

Douglas R. Tengdin, CFA

Chief Investment Officer

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