In today’s world, both companies and their investors are increasingly emphasizing the environmental, social, and governance (ESG) aspect of businesses. Asset managers are therefore incorporating ESG factors into their investment methodologies. They need to monitor several ESG controversies related to their investments on an ongoing basis. The simplest way to monitor is through timely tracking and instant alerts.
Continuous monitoring of portfolio companies helps asset managers to mitigate potential risks and safeguard their capacity to generate revenue, maintain a positive public image, and recruit and retain top talent.
What are ESG controversies?
ESG controversies occur when a company's operations are deemed to have a detrimental effect on the environment, society, or governance. These controversies may harm the company's reputation, lead to financial loss, or even invite legal action.
Common ESG controversies that asset managers encounter include greenwashing, corruption, human rights violations, and environmental spills. Below are a few recent instances of ESG controversies.
- Starbucks: In 2022, Starbucks Workers United filed numerous complaints against the company, alleging unfair employment practices, including violations of the National Labor Relations Act. The National Labor Relations Board (NLRB) has accused Starbucks of interfering with the formation of a union by restraining, coercing, and firing workers or by promising benefits.
- Verizon: The Citizens Air Complaint Programme has listed Verizon as one of the top 10 idle tower offenders in New York City. It has a total of 2,813 summons.
- Microsoft: In January 2023, Microsoft lost a tax audit lawsuit against the Internal Revenue Service.
In FY2021, ESGRisk.ai, an ESG rating company, analyzed companies on the NSE 600 and suggested that business ethics was a major reason for ESG controversies. According to the company, business ethics accounted for 72.6% of controversies in the service and manufacturing sectors. The analysis concluded that the banking and financial services industries experienced the highest number of controversies, followed by pharmaceuticals and metals. In 2019, an analysis by Bank of America revealed that conflicts over ESG issues had led to a USD534 billion reduction in the value of large US companies during 2014-19.
Why it is important to monitor ESG controversies
Governments are increasingly enacting regulations such as Sustainable Finance Disclosure Regulation (SFDR) and Sustainability Disclosure Requirements (SDR), which are compelling asset managers to constantly monitor ESG controversies associated with their portfolio companies. Here are a few more reasons why it is important for asset managers to monitor ESG controversies.
- Risks: By monitoring ESG controversies, asset managers can identify potential financial, operational, and legal risks and take mitigating actions to reduce their adverse effects on the business operations and financial performance of their portfolio companies.
- Reputation: ESG controversies associated with a portfolio company often have a damaging effect on an asset manager's reputation and image. Investors may withhold their money if asset managers are seen investing in controversial businesses. In 2022, Signal AI, an AI company, conducted a survey poll that covered 1,000 C-suite executives across businesses with at least 250 workers. According to the poll, 92% of business leaders said that ESG controversies would impact the reputation of their companies.
- Financial performance: A company entangled in a controversy related to irresponsible / unethical ESG practices could face elimination from an index and even invite criticism from NGOs and media agencies. This would hurt its sales, productivity, and stock price, and in turn drag down an asset manager’s profit margins.
- Employee engagement and retention: ESG controversies can lead to employee disengagement because people may feel conflicted or uncomfortable working for an asset manager that supports organizations engaged in controversial businesses.
- Investor demands and preferences: Investors who have a high focus on sustainability and ethical behavior are less likely to work with an asset manager that invests in companies entwined in ESG controversies.
Asset managers may not always be required to adjust their investments in response to controversies. However, they must be aware of the real-time status of their portfolio companies to be able to make informed decisions as and when required.
How asset managers can monitor ESG controversies
Asset managers can monitor ESG controversies from outside or external sources as ESG controversies are generally absent or often delayed in company’s reporting. Asset managers can use sources such as the following to monitor ESG controversies:
- News articles (ESG Today, Environmental News Network)
- NGOs (Friends of the Earth, Greenpeace)
- Social media posts (Facebook, Twitter, LinkedIn)
- Industry reports (UN PRI)
- Government reports (US Food and Drug Administration, European Environment Agency)
- ESG databases (MSCI ESG Controversies and Sustainalytics ESG Controversy)
However, asset managers frequently struggle with off-the-shelf sources that cannot be customized to provide results as per their needs.
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.
