In 2015, CFA Institute published Environmental, Social and Governance Issues in Investing: A Guide for Investment Professionals.  The first paragraph of the summary read as follows:

A critical factor in the financial performance of investments is the investor’s ability to identify drivers of the expected risk and return of investments. Financial analysts and portfolio managers are expected to be familiar with the financial factors that drive the value of an investment. However, issues that are difficult to measure in monetary terms and that do not form part of traditional financial metrics also affect the risk and return of investments—at times, decisively. In general, these issues are referred to as environmental, social, and governance (ESG) issues.

On October 18, 2017, CFA Institute released updated findings in its Environmental, Social and Governance (ESG) Survey Report. This survey confirmed that, as in 2015, 73 percent of respondents take ESG into account in their investment analysis and decisions.

Vincent Papa, director, financial reporting policy for CFA Institute, notes that CFA Institute looks at initiatives that enhance company-reported ESG information and how it is incorporated into investment analyses. To do that effectively you need high-quality information. “Our members and investors rely on various sources of information, including what companies disclose. But there is an increasing recognition and validation being done through surveys which shows that there’s a gap between the quality of information that’s provided by companies and the suitability of this information to what investors need. There’s an information gap,” Papa continues, “and the need for initiatives that increase the quality of ESG information.”

CFA Institute’s 2017 ESG Survey respondents confirmed that the three factors that most limit their organization’s ability to use non-financial information in investment decisions are: a lack of appropriate quantitative ESG information, a lack of comparability across firms and questionable data quality.

ESG Information Sources

When the SEC was looking at modernizing disclosures in 2016, one of the questions raised was, “What needs to be done to improve the quality of sustainability information?” Feedback from the investment community included the need to improve the quality of company reporting.

So, what are some of the “various sources” that CFA Institute members and charterholders rely on for high-quality information on ESG issues?

The Sustainability Accounting Standards Board (the SASB) recently published its Exposure Draft Standards for 79 U.S. industries, which are now open for a 90-day public comment period, ending December 31, 2017. This period allows the public to review and comment on proposed changes to help ensure high-quality standards that are cost-effective and decision-useful.

Papa identifies the International Integrated Reporting Council (IIRC) as a global initiative working to ensure that companies go beyond providing ESG data in a siloed fashion and incorporate it into a cohesive value creation story. Papa says, “Inform investors how this information links to the business strategy, the finances, the risk management of reporting entities, and don’t just detail it in one chapter of an annual report or a separate Corporate Social Responsibility (CSR) report.”

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