In the contemporary business landscape, the emphasis on environmental, social, and governance (ESG) has grown significantly by both companies and investors. Asset managers are adapting to this paradigm shift by integrating ESG factors into their investment methodologies and necessitating ongoing monitoring of ESG controversies associated with their investments. The most efficient way to achieve this is through real-time tracking and instant alerts.
Continuous monitoring of portfolio companies is essential for asset managers as it enables them to mitigate potential risks, safeguard revenue generation, maintain a positive public image, and attract and retain top talent.
Understanding ESG Controversies
ESG controversies arise when a company's operations are perceived to have a detrimental impact on the environment, society, or governance aspects. These controversies can harm a company's reputation, lead to financial losses, or even result in legal actions.
Asset managers frequently encounter common ESG controversies, including greenwashing, corruption, human rights violations, and environmental spills. Here are a few recent examples:
- Starbucks: In 2022, Starbucks faced numerous complaints from Starbucks Workers United, alleging unfair employment practices and violations of the National Labor Relations Act. The National Labor Relations Board (NLRB) accused Starbucks of interfering with union formation through restraint, coercion, worker terminations, or promises of benefits.
- Verizon: The Citizens Air Complaint Program identified Verizon as one of the top 10 idle tower offenders in New York City, with a total of 2,813 summonses.
- Microsoft: In January 2023, Microsoft lost a tax audit lawsuit against the Internal Revenue Service.
The Significance of Monitoring ESG Controversies
Several factors underscore the importance of asset managers monitoring ESG controversies:
- Regulatory Compliance: Governments are enacting regulations like the Sustainable Finance Disclosure Regulation (SFDR) and Sustainability Disclosure Requirements (SDR), compelling asset managers to continually monitor ESG controversies associated with their portfolio companies to ensure compliance.
- Risk Mitigation: Monitoring ESG controversies allows asset managers to identify potential financial, operational, and legal risks and take proactive measures to mitigate their adverse impacts on portfolio companies' business operations and financial performance.
- Reputation Management: ESG controversies linked to portfolio companies can tarnish an asset manager's reputation and image. Investors may hesitate to invest with asset managers associated with controversial businesses, as highlighted by a 2022 survey conducted by Signal AI among 1,000 C-suite executives.
- Financial Performance: Companies embroiled in ESG-related controversies may face removal from indices and criticism from NGOs and media outlets. This can negatively affect sales, productivity, stock prices, and, subsequently, an asset manager's profitability.
- Employee Engagement and Retention: ESG controversies can lead to employee disengagement, as employees may feel conflicted or uncomfortable working for asset managers supporting controversial organizations.
- Investor Demands: Investors with a strong focus on sustainability and ethical behavior are less likely to engage with asset managers who invest in companies entangled in ESG controversies.
While asset managers may not always need to adjust their investments in response to controversies, staying informed about the real-time status of their portfolio companies is crucial for making informed decisions when necessary.
Monitoring ESG Controversies
Asset managers can monitor ESG controversies using external sources, as these issues are often absent or delayed in company reporting. These sources include:
- News articles: Platforms like ESG Today and Environmental News Network provide relevant updates.
- NGOs: Organizations like Friends of the Earth and Greenpeace often report on ESG-related concerns.
- Social media: Platforms like Facebook, Twitter, and LinkedIn can provide real-time insights into controversies.
- Industry reports: The United Nations Principles for Responsible Investment (UN PRI) produces reports on ESG issues.
- Government reports: Agencies like the US Food and Drug Administration and the European Environment Agency publish data on environmental and governance matters.
- ESG databases: Specialized databases such as MSCI ESG Controversies and Sustainalytics ESG Controversy offer comprehensive information.
However, asset managers often grapple with off-the-shelf sources that may not cater to their specific needs, highlighting the importance of customizable solutions in the field of ESG controversy monitoring.
How Evalueserve can help
Evalueserve provides custom solutions to asset management firms which allows for curation of ESG data specific to an investment manager’s responsible investment framework and its reporting needs. Its proprietary mind+machineTM approach offers best-in-class technology and an array of domain experts. Evalueserve’s ESG experts harness the most relevant and actionable insights that help asset managers to connect controversies to specific KPIs. Insightsfirst, its sustainability-specific AI-powered platform, can be tailored as per asset managers’ requirements to get the most accurate and relevant information on ESG controversies and opportunities. The platform can
- Periodically identify ESG opportunities and controversies using 200,000+ sources
- Create a 360-degree view of an investment portfolio to help asset managers make informed decisions
- Tag identified controversies / opportunities as per ESG KPIs, geography, etc.
- Analyze 100+ ESG risk indicators across 49 themes and 120 sub-themes
Some of its key features are
- Trigger / criteria-based controversy / best practice identification
- Quick scalability and easy customization of outputs
- Seamless integration with existing applications and data sources
- Newsletter creation based on requirements
- Easy to use watchlists, dashboards, and in-platform user analytics
- Comprehensive report creation, ask-the-analyst deep dives, and anecdotal intelligence
If a client requires, Evalueserve can also offer an additional level of analysis by applying its C.A.S.E. methodology. Our experts use this methodology to conduct thorough and transparent controversy analyses by assessing the Connection a company has with a controversy, the Action it is taking, the Severity of the issue, and the Exposure it has to the controversy. This methodology gives the client control over the number of controversy assessments it wants to conduct and the flexibility to customize output by either keeping the raw data or converting it into an aggregated metric.
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