Roberts and Young-Ferris’s paper details the frustrations that a large global fund manager (InvestCo) encountered trying to quantify and systematise ESG analysis within an investment process reliant upon a traditional financial accounting framework.

PRI and Sycomore award for the most outstanding research in responsible investment: BEST QUALITATIVE PAPER

Immature or impossible: making environmental, social and corporate governance issues calculable for investors?

John Roberts (Professor at The University of Sydney Business School) and Anna Young-Ferris (Lecturer at The University of Sydney Business School), Immature or impossible: making environmental, social and corporate governance issues calculable for investors? 

These frustrations included:

  • a head fund manager’s concerns about the quality and usefulness of ESG data;
  • a data provider’s attempts to overcome these concerns by developing a comprehensive ESG database;
  • disagreement between the ESG integration team and the investment team’s data managers about whose responsibility it was to distil the data and find the most material ESG issues.

The authors then explore whether ESG issues can be made calculable for investors and whether ESG accounting data can be viewed as an immature form of accounting that, over time, will be as robust as financial accounting, or whether that is an impossibility.

The study draws on observations from 60 interviews and 67 meetings conducted by Young-Ferris over three and a half years.

Issue 1: Fund managers don’t trust the data

As head of an investment team that believes in the power of numbers, the fund manager’s view was that ESG data is poor, incomplete, lacks standards to govern its production and is inconsistent, so doesn’t allow comparison between companies. A key criticism was that ESG questions are answered with words not numbers and that even when good ESG data was available, it was ambiguous and “unlikely to be material”. For example, a low number of work days lost to strikes could be read either as a sign of good labour relations, or of a management who yield too easily to employee demands at the expense of shareholders returns.

Issue 2: The idiosyncrasies of data providers’ methodologies

To appease the frustrations of the investment teams, InvestCo changed ESG data provider.

They believed the new provider offered more timely, comprehensive, comparable and factual data. It produced an ESG rating for 3,000 listed companies, ranking 750 equalweighted data points about each company, gleaned from CSR reports, news feeds and NGO websites, which then fed into 250 key performance indicators (KPIs).

However, the use of equal weighting, as it admitted, created perverse effects. For example, the Deepwater Horizon incident in 2010 scarcely dented BP’s overall ESG rating because “oil spills” affect just one of those 250 equally weighted indicators. Thus, the data provider’s process of scaling to structure ESG data like financial data only served to obscure what was meaningful.

The methodology also produced a reporting bias – strong reporters would automatically score more strongly – thus favouring large cap companies that “have the money and do the big reports”.

Issue 3: Responsibility falling between the cracks

The ESG integration team proposed that the investment analysts reduce the 250 KPIs down to the 30 or so most relevant and material to the company and industry sectors that they were interested in. However, the investment team had expected to be handed a single E, S and G score to include in their valuation model template for each stock.

InvestCo’s aim had been to introduce an ESG metric in the valuation model – albeit as an optional risk weighting – but this was not accomplished in the three-and-a-half year research period. The only integration that actually happened was when the ESG integration team member joined the team stock reviews and meetings with senior company executives, where ESG-related discussions appeared to be an afterthought to the financiallyfocused discussions.


At InvestCo, the ESG data failed to resonate with the investment analysts, so remained tangential to their core activity. If the analysts couldn’t translate the impact of these ESG indicators into dollars, they were of little or no use.

ESG accounting has tended to use the structure of financial accounting as its model, and investors have played a key role in making ESG data more robust via standards and assurance. However, due to the difficulty in translating the sheer volume and diversity of the qualities the ESG data captures into an aggregated measure, the data lacks the essential characteristics that would enable it to be meaningfully integrated with financial accounting data.

The authors conclude: “Rather than seek to further subordinate ESG accounting to the demands of investor relevance, we should, perhaps, recall the founding, political inspiration of early social and environmental accounting researchers and insist that the purpose and function of such reporting is to create a public visibility for what financial accounting refuses to see. After all, even what is not judged material for the investor may nevertheless prove material for the environment and for society”.

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    RI Quarterly vol. 8: Highlights from PRI In Person 2015

    September 2015

RI Quarterly vol. 8: Highlights from PRI In Person 2015