On May 20, we hosted a video webinar with Cornerstone’s Katherine Pease and Craig Metrick, who provided an overview of our new impact measurement framework, the Access Impact Framework.  Katherine and Craig provided background on why Cornerstone created the framework, our rationale for basing our framework on the UN Sustainable Development Goals, and described our methodology.

Editor’s note: This Sustainalytics report struck us as offering cogent insights, and the authors kindly granted us permission to share this summary. The full report can be found here.

Key Insights

Gauging cultural compatibility with ESG scores 

This report explores how environmental, social and governance (ESG) compatibility may contribute to the financial success of mergers and acquisitions (M&A). Although M&As can present synergistic opportunities, firms involved in such deals are prone to several risks, including potential losses associated with withdrawn or terminated transactions, volatility in company valuations, credit rating downgrades and other financial and legal consequences. A recognized element in the success of completed M&As is the cultural cohesion of the acquiring and target firm. Using ESG scores as a proxy for firm culture, we analyze 231 M&As completed between 2011 and 2016 and test whether deals transacted between companies with comparable ESG scores outperformed those that involved companies with disparate stances on ESG. While other factors can influence the returns of acquiring firms, our analysis suggests that ESG compatibility may positively contribute to the financial success of M&A deals. We also examine the ESG profiles of firms involved in 83 pending M&As and discuss future avenues of research.

Cumulative total returns of acquiring companies in M&A deals  

Source: Sustainalytics, Bloomberg

Opportunities and risks in mergers and acquisitions 

The M&A market is immense. Since 2000, approximately 700,000 M&As have been announced with a total transaction value of USD 50tn.

M&As can present a variety of opportunities to shareholders. Combining companies or assets may result in synergy – the production of shareholder value that is greater than the sum of the value produced by each organization alone.

M&A transactions can also pose material risks, however. According to data from Bloomberg, more than 15,000 M&As with announced values totalling USD 1.3tn were terminated or withdrawn in 2016, resulting in substantial financial losses to prospective buyers and sellers due to incurred expenses, termination fees and share price volatility. Moreover, even when a deal goes through, buyers and sellers still face risks, such as credit rating downgrades, reputational blowback and financial underperformance.

The role of corporate culture

While M&A success and failure can be defined in a variety of ways, analytical metrics typically focus on subsequent changes to shareholder value. In this regard, contributors to M&A success include attaining reliable company valuations, undertaking prudent due diligence measures, and ensuring that the business models and corporate cultures of the target and acquirer are compatible.

We find the cultural cohesion between acquirers and targets particularly interesting in the context of predicting M&A success because a growing body of evidence suggests that firm culture matters more in M&A deals than previously believed, and because of the challenges involved with measuring firm culture relative to other drivers.

ESG as a proxy for culture

A company’s broad positioning on ESG issues, including policies and programmes to manage its environmental and social impacts, human capital development and progressive governance measures, can be used as an insightful proxy for firm culture.  ESG analysis may not capture all aspects of company culture, but in our view it is an increasingly revealing reflection of company norms, especially among mega and large-cap equities where ESG programmes are prominent.

In order to test how corporate ESG compatibility may contribute to the financial success of M&A deals, we analyzed a dataset of 231 M&As completed between 1 June 2011 and 31 May 2016. The 410 firms involved in these deals cover 40 industries and all global markets, with a total announced value of these deals amounts to USD 1.6tn.

We organized the 231 M&As into two groups: ESG compatible deals and ESG incompatible deals. The former category includes transactions in which the difference between the acquirer’s and target’s overall ESG score was equal to or less than five points (in absolute terms) one month prior to the deal completion date. ESG incompatible deals are those in which the difference between the acquirer and target’s ESG score was greater than five points. While the optimal threshold for determining ESG compatibility may vary on a case-by-case basis, and one could use individual E, S, and G indicators to investigate specific ESG compatibility issues, we regard a +/- 5 point differential as a reasonable starting point for this area of research.

The results of this analysis are summarized in the table below (and shown in the chart at top). Acquiring companies involved in M&A deals with an ESG compatible target delivered an average five-year cumulative return of 64%, which compares favourably to the 43% cumulative return for acquiring companies involved in ESG incompatible transactions, and the 53% cumulative return of the sample as a whole.

Cumulative total returns of M&A deal types 

Source: Sustainalytics

Understanding the limitations

While our analysis suggests that ESG compatibility may positively contribute to the financial success of M&A deals, it is important to stress the limitations of our approach. Not the least of these is that the returns of acquiring companies are subject to forces well beyond the impact of M&A transactions, even large M&A transactions.

Another limitation is industry bias. The acquiring companies in the 93 ESG compatible deals are overweighted in banks (8%), real estate (8%) and oil and gas (6%). The composition of the acquiring firms involved in the 138 ESG incompatible deals is quite different, with a concentration in telecommunications (9%), banks (7%) and pharmaceuticals (7%). We also did not account for the effects of firm size: some M&A deals matter more to some acquirers than others.

Despite these limitations, our analysis contributes a new approach to exploring the potential benefits of assessing acquirer-target compatibility in structuring M&A transactions.

Conclusion – Increasing value of ESG analysis

ESG compatibility is only one of many lenses through which an M&A transaction can be viewed. But it is an instructive lens all the same, and possibly one that will become more valuable over time, given the growing importance of cultural cohesion in delivering shareholder value in M&As and the steady uptick of investor and corporate interest in ESG. Our initial analysis on this topic offers a new perspective for investors and management teams to consider when thinking about M&A deals.


Doug Morrow is an innovative, MBA-educated, award-winning research director with 12 years of experience in the responsible investment industry. His work bridges financial analysis and investment strategy with ESG trends and factors. Doug is based in Toronto and leads Sustainalytics’ thematic research team.

Martin Vezér supports the management of internal innovation projects and thematic research publications at Sustainalytics. Prior to joining Sustainalytics, Martin was a postdoctoral scholar at Pennsylvania State University. He earned his Ph.D. in philosophy from the University of Western Ontario and his Master of Science degree from the London School of Economics and Political Science.


Today, Environmental, Social and Governance (ESG) data are helpful to investors — but not helpful enough.  Environmental information about greenhouse gas emissions has enabled investors to identify companies that seem vulnerable to a potential carbon tax, and has also highlighted companies that have materially improved energy efficiency.  Similarly, many companies have been reporting data on water consumption and waste generation, two other factors that can prove financially material.  Although these environmental disclosures contain valuable information, they seem unlikely to drive near-term (i.e., 12-month) stock price performance any time soon.

While measurements of many environmental costs are now well established, metrics for social issues are still in need of a lot more rigor.  This is somewhat paradoxical, given that social issues have been an important driver of stock prices lately.  For example, automation in the retail sector remains of keen interest to investors, even as few companies have developed a comprehensive strategy to address the issue, let alone provided information about the possible impact on their business—e.g., comparable data on the number of employees, both full-time and part-time.

As we outline in detail below, the key issue facing investors looking to integrate ESG data into an investment framework today is not the absence of data but, rather, the absence of data that have material significance for near-term stock price performance.

Evaluating Intangible Factors with ESG Data

ESG data can help investors better understand the value of intangible factors.  Ocean Tomo analysis shows that between 1975 and 2015, intangible assets increased from 17% of the market value of the S&P 500 to 87% — Figure 1.

Figure 1: Components of S&P 500 Market ValueFigure 1: Components of S&P 500 Market Value Source: Ocean Tomo

Intangible assets are those things an investor can’t touch, but can name.  For example, many investors consider environmental performance, a social license to operate (a dedicated workforce, loyal customers, and so forth), and corporate governance to be integral intangible assets.  Based on a survey of issues considered relevant today, Figure 2 lists 36 intangible factors that can be material to companies, industries and sectors; these are categorized under the headings “environmental,” “social,” and “governance.”

Figure 2: 36 Intangible Factors That Can Be Material to Companies, Industries, and Sectors* Figure 2: 36 Intangible Factors That Can Be Material to Companies, Industries, and Sectors

*In this methodology, the boundaries between the three factors are somewhat fluid.  So, for example, the Governance category includes “Accident & safety management” and “Supply chain management;” it could be argued that these should both fall under the Social category.

Source: Cornerstone Capital Group

Despite significant progress made in disclosing, reporting and aggregating ESG data, the evaluation of intangible factors remains challenging, in large part reflecting:

Too Little Material Data

Several information providers — including Bloomberg, MSCI and Sustainalytics — provide both data and analysis on corporate performance across a range of environmental, social and governance indicators.  (It is important to note, however, that the various research methods are not standardized.)  These sustainable finance facilitators typically provide several types of services:

So, for example, Bloomberg calculates an ESG Disclosure score for thousands of companies globally to quantify the overall extent of a company’s ESG reporting:

The weighted Bloomberg score is normalized to range from zero, for companies that do not disclose any ESG data, to 100, for those who disclose every one of the 219 data points collected.  Currently, the average Bloomberg ESG disclosure score for companies in the S&P 500 is just 29.  (Note here that, for the reasons outlined below, we are not suggesting it would be optimal for every company to disclose on each of the 219 data points.)

Illustrating this data paucity, Figure 3 shows that, per Bloomberg, several prominent food retailers — including Whole Foods Market, which initially built its reputation by focusing on ESG issues — do not disclose greenhouse gas, water usage or waste generation metrics.  In addition, these companies report virtually no social data.

Figure 3: Current ESG Metrics of Five Food RetailersFigure 3: Current ESG Metrics of Five Food Retailers

Source: Bloomberg

Too Much Immaterial Information

Turning to ESG ratings, it has been shown[1] that ratings from different ESG data vendors have frequently not converged, and have led to different conclusions.  In addition, it is often the case that the ratings systems employed by the vendors tend to reward companies that produce a lot of ESG disclosure, even if it is not material.

Using BP as an example, it has been pointed out[2] that:

The Deepwater Horizon incident in 2010 scarcely dented BP’s overall ESG rating because “oil spills” affect just one of [the] 250 equally weighted indicators [from an ESG data provider]. Thus, the data provider’s process of scaling to structure ESG data like financial data only served to obscure what was meaningful.

Similarly, Volkswagen (VW) is another example of a large, well-capitalized company that disseminated nonfinancial data which contributed to the company ranking well in some of the ESG databases.  In August 2015, just prior to the revelation that emissions had been systematically and intentionally underreported, MSCI ESG Research upgraded VW’s rating because of “proactive steps to lower the environmental impacts of its products — reducing its vehicle fleet carbon emissions and recall rates in recent years.”[3]

And just weeks before the scandal broke, in early September 2015 VW put out a press release[4] to announce:

The Volkswagen Group has again been listed as the most sustainable automaker in the world’s leading sustainability ranking.  As in 2013, RobecoSAM AG again classed the company as the Industry Group Leader in the automotive sector in this year’s review of the Dow Jones Sustainability Indices (DJSI).  Volkswagen is thus one of only two automakers to be listed in both DJSI World and DJSI Europe.

A broad study[5] of this issue by a team at the Harvard Business School observed that:

Firms release a wealth of information in the form of ESG data, but the sheer number of sustainability issues…raises the question of which of these ESG data are material.

In fact, the Harvard researchers found that just 20% of the items in the sustainability dataset they used were material by the standards of the Sustainability Accounting Standards Board (SASB).

One issue here might be that the materiality of different ESG issues varies across sectors.  For example:

It is also the case that, within sectors, ESG risks and opportunities can vary by industry (see An Atypical Analysis of Industry Risks, Cornerstone Capital Group, May 26, 2016), which again highlights the potential complexity of ESG analysis in the absence of robust data.

Cost of Data Collection

A recent survey[6] of senior investment professionals from mainstream (that is, not ESG-oriented) investment organizations identified the “cost of gathering and analyzing ESG data” as a major barrier to using ESG information for investment decision-making.  The authors of the survey review acknowledged that many data providers have expanded their capacity and capabilities to collect and distribute ESG data to the investment community.  Of course, once investors obtain this ESG information from the data providers, it must then be analyzed for investment significance, which can be challenging.

An example from our own research pertains to the number of employees of retail companies in the United States, per Bloomberg.  In preparing our 2017 report Retail Automation: Stranded Workers?, we downloaded the current employee data for 30 major retail companies.  Broad analysis of the data showed that while all the companies provided some employee data, companies reported different employee metrics, including total employees (full-time and part-time) or Full-Time Equivalent (FTE) employees (a summation of full-time and part-time employees with part time counting as 0.5 FTE).

We noticed that several companies had significant changes in employment numbers between reporting periods and we had to corroborate each employment data point with each company filing to ensure accuracy and consistent metrics.

From the reporting companies’ perspective, the sheer number of reporting frameworks and sustainability indices that now exist is raising questions about whether the time and resources spent filling out sustainability questionnaires is worth the corporate effort and cost.  Around 50,000 companies are subject to annual ESG evaluations by 150 ratings systems on approximately 10,000 performance metrics.  The diversity of organizations and systems, ratings, and metrics has brought many corporate sustainability managers to the verge of “survey fatigue.”

By way of example, each year RobecoSAM asks over 3,400 listed companies around the world between 80-120 industry-specific questions focusing on economic, environmental and social factors.  The questionnaire for the Metals & Mining industry (one of 60 different questionnaires) runs to 138 pages.  Similarly, General Electric responded to more than 650 individual questions from ratings groups in 2014.  The process took months to complete, and required more than 75 people to finish.

A Big-Cap, Developed Markets Bias, Particularly Toward Europe

While fewer than 20 companies globally disclosed ESG information in the early 1990s, the number of companies issuing sustainability reports increased to nearly 9,000 by 2016.  In the United States, sustainability reporting by S&P 500 companies rose from just 20% in 2011 to 81% in 2015.

In the European Union, a 2014 directive mandated corporate disclosure of non-financial information (including environmental, social and governance information) for the 2017 fiscal year, so that the first company reports are expected in 2018.

Several European countries — including France, Germany, Italy and the United Kingdom — have already been requiring some form of sustainability reporting.  Not surprisingly then, a KPMG report[7] pointed out:

Europe continues to have a clear lead among the regions in terms of the overall number of [sustainability reporting] instruments [mandatory or voluntary] in place.  This is to be expected given the high number of countries within the region and given that sustainability reporting and associated instruments are more mature in Europe than in many other regions.  The number of reporting instruments in European countries has continued to grow significantly…Our research identified 155 instruments in 2016 compared with [just 25 in North America].

In contrast to Europe and the United States, there is much less data disclosure and collection on companies in emerging markets.  That said, we have highlighted[8] the fact that, given wide divergences in the quality of corporate governance in emerging markets, ESG-based stock selection can add significant value in emerging market countries.

Cornerstone Capital Group’s Experience: ESG, Equity Strategies and Global Themes

Despite the issues outlined above, ESG data can play a valuable role in the investment decision-making process.  A thoughtful and consistent ESG framework can facilitate evaluation of risks and opportunities not always apparent on income statements or balance sheets.  So, for example, in recent years, analysts at Cornerstone Capital Group have published two types of investment research that have integrated ESG analysis:

  1. Sector Equity Strategy
  2. Global Thematics

Sector Equity Strategy

In our June 23, 2015 report, ESG in Sector Strategy: What’s Material? we developed an approach to analyze intangible factors that can potentially have a material financial impact on sectors, specifically MSCI ACWI GICS.  In the first step, we identified what we considered to be the most important intangible factors for each sector.  Figure 4 shows for nine sectors the relevance of 36 intangible factors according to their categorization in Figure 2 above.

Figure 4: Relevance of Intangible Factors by SectorFigure 4: Relevance of Intangible Factors by Sector

Source: SASB, Cornerstone Capital Group

In the second step, we examined the MSCI ACWI GICS and plotted the estimated likelihood that a materially adverse sustainability issue would occur, against the potential financial impact of the adverse event.  Figure 5 illustrates the estimated positions of sectors at the time of report publication.

Figure 5: An ESG Materiality Matrix: “Most” and “Least” Risky SectorsFigure 5: An ESG Materiality Matrix: "Most" and "Least" Risky Sectors

Source: Cornerstone Capital Group

We then multiplied the likelihood and the potential degree of ESG impact to calculate the probability-weighted financial impact of an adverse ESG event.  Figure 6 shows that sectors with relatively high ESG probabilities have had lower P/Es than sectors with relatively low ESG probabilities.

Figure 6: Sector P/E vs Probability-Weighted Impact of Adverse ESG EventFigure 6: Sector P/E vs Probability-Weighted Impact of Adverse ESG Event

Source: Cornerstone Capital Group

Global Thematic Research  

The second investment research product that has been published by Cornerstone Capital Group is global thematic research, which incorporates ESG factors to provide a unique lens for investors.  The research details the deep investigation of emerging but material trends that are cross-regional and cross-sectoral.  Our objective is to identify trends that may have material impact on investment returns after nine months — but before 24 months — following the report’s publication.  We set this timing benchmark after analyzing the outcomes of our previous thematic research.

Recent examples of research include:

Our framework categorizes each trend into one of three factors:

A confluence of all these factors is likely to provide the greatest investment opportunities (Figure 7).

Figure 7: Trend assessment frameworkFigure 7: Trend assessment framework

Source: Cornerstone Capital Group

The global thematic investment research uses top-down ESG assessments, including the Sustainable Accounting Standards Board’s (SASB) Materiality Matrix, and bottom-up issue identification. The bottom-up assessment entails fundamental analysis with a focus on reviewing company filings, earnings calls, and industry trends.

The resulting analysis identifies emerging but material ESG issues that are likely to impact the company, industry or sector within an investable timeframe. ESG data is then used to understand the potential impact on an absolute (single company level) and relative (between companies) level.

The results of the assessment generally provide an indication on the relative positioning of each company on an issue, with an example relating to extractive companies as shown in Figure 8.

Figure 8: Extractive company thematic assessmentFigure 8: Extractive company thematic assessment

Source: Cornerstone Capital Group


As ESG integration practitioners, our proprietary investment lens has benefited from all aspects of the improvement in ESG data.  However, there are still substantial challenges to integrating ESG data as a way of confidently valuing the “intangible assets” of companies, industries, and sectors.  Areas of improvement that we would prioritize:

[1] “Do Ratings of Firms Converge?” Strategic Management Journal, Chatterji, Durand, Levine and Touboul, October 2014

[2] “Highlights from PRI In Person 2015,” PRI Academic Network RI Quarterly, October 2015

[3] https://www.msci.com/volkswagen-scandal

[4] http://media.vw.com/release/1058/

[5] “Corporate Sustainability: First Evidence on Materiality,” The Accounting Review, Khan, Serafeim and Yoon, November 2016

[6] “Why and How Investors Use ESG Information: Evidence from a Global Survey,” Harvard Business School, Amel-Zadeh and Serafeim, 2017

[7] https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/carrots-and-sticks-may-2016.pdf

[8] /wp-content/uploads/2017/02/ESG-Factors-in-Strategy-16-Feb-2017-ExecSum.pdf

Michael Geraghty is the Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry.  Michael has worked as an investment strategist at a number of leading firms.  At PaineWebber (1988 – 2000), he was a Senior Vice President and member of an Institutional Investor ranked U.S. Portfolio Strategy team.  At UBS (2000 – 2003), he was an Executive Director and senior member of the global equity strategy team responsible for regional and sector allocations.  At Citi Investment Research & Analysis (2004 – 2012), Michael was the global themes strategist; Citi was ranked #1 for Thematic Research in the 2011 Extel survey.  Michael holds a Master’s degree in Economics and a Masters of Business Administration in Finance from Columbia University.

Sebastian Vanderzeil is a Director and Global Thematic Analyst with Cornerstone Capital Group. Sebastian’s research spans a range of themes including climate, energy, income inequality, automation and technology. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian holds an MBA and was a Dean’s Scholar at New York University’s Stern School of Business, and has a bachelor’s degree in natural resource economics from the University of Queensland.

Last week, national governments, business, and civil society leaders came together at the United Nations’ High-level Political Forum (HLPF) in New York. With C-Change, we were asked to address attendees to the SDG Business Forum following our report SDG Investing: Advancing A New Normal in Global Capital Markets. The report, jointly commissioned by United Nations Department of Economic and Social Affairs (UN-DESA), reviews prevalent barriers to investing in social and environmental impact and begins to describe the toolkit that the public sector can tap into, to trigger change.

At C-Change we envision a world where businesses and investors lead the way in solving the biggest problems of our time. Where a ‘new normal’ in global capital markets is achieved and these markets are wired to deliver on both profit and purpose. Our mission is not only trigger greater action within the sector, but also equip all business and investors with the tools they need to provide a strategic and meaningful contribution to the SDGs.

We did this in The Netherlands, where alongside the Dutch financial sector, we presented a national SDG investing (SDGI) agenda to Lilianne Ploumen, Dutch Minister for Foreign Trade & Development Cooperation, and Frank Elderson, Director at the Dutch Central Bank. We are doing this at a global level, through our convening, research, and innovative partnership technology, IMPACT PRO(Filer), a LinkedIn like SDG community portal – which is already used by the Dutch government to profile national SDG contributions. Our hope for this report is that it will help create a sense of urgency for the investor community to change its game and for governments to take full advantage of the ‘sticks and carrots’ it has at its disposal to advance SDGI.

The SDGI Need & Opportunity

In their excellent report, the Business & Sustainable Development Commission rightly concluded that the SDGs represent a significant $12 trillion dollar business opportunity, $13 trillion if externalities are included.

Yet, as Lise Kingo (Executive Director at UN Global Compact) flagged during the SDG Business Forum, we are far from reaching the scale and impact needed to achieve the Global Goals: A sea change is needed. Even the pioneers in this space, many of whom were present at the Forum, cannot lean back. We need to continuously hold ourselves and the markets in which we operate to a higher bar.

Earlier this year, the Financing for Development Office and the Division for Sustainable Development at UN-DESA, commissioned our team to provide an honest perspective on the role of sustainability – or lack thereof! – in markets today. The report provides a review of mainstream investor perspectives as well as concrete actions the global, regional, and local governments can take to advance what we’ve come to call ‘SDG investment’: All investments and portfolios where societal factors form a ‘material’ factor in investment decisions.

A New Term: Really?

We can already imagine the reactions among the investment community. A new term. Really? Two comments to this important concern, which we agree cannot be underestimated. Enough time is spent already trying to agree on shared definitions. First and foremost, SDGI is not trying to redefine the market. In reality, it is not more than a lumping together of the investment strategies offered by Bridges Ventures (2016) below, and which have been recognized by many.

We believe that the added value of this umbrella term is that it forces a parallel, yet distinct conversation about the two major shifts that are needed in markets today:

(1) A shift towards a world where all investments are reviewed for their societal impact, versus only 26% or ~ $23 trillion of global Assets under Management (AuM) today; and

(2) A shift whereby an ecosystem emerges where investors are triggered and equipped to maximize the positive contributions of each investment dollar while staying within their required risk and return expectations. (Strikingly, impact investing constituted only an estimated 250Bn in 2015, less than 1% of SDGI)

Figure 1:  SDG Investing: Recognized Investment Strategies, Lumped Together

Source: Bridges Ventures 2016, European SRI Study 2012, C-Change analysis

Figure 2: A 2-Pronged Market Conversion Challenge

Key insights from the report are by no means all new and recognize the research and contributions of many experts and practitioners in the field. It concludes:

1) Despite Momentum, Barriers to SDGI Prevail – Despite momentum, significant practical barriers exist that cut across the demand, supply, intermediation, and infrastructural sides of markets. I would add to this a barrier related to what constitutes ‘value’ and the importance of shifting away from ‘short-termism’. I’ll cite an insurance firm investment officer who in my conversation with him noted that the word ‘impact’ is still a dirty word for many investors. Something that ultimately needs to change to build markets that are future proof.

“If I use the word “impact” with other investors, I am dead” – Investment Officer

2) The SDGs: A Powerful Silo Buster, Yet Not an Investment Framework (Yet) – The SDGs offers a powerful framework for building momentum, bringing sectors together, and putting sustainability on the radar screen of the investor community. It is not (yet) ready to be the evaluation frame of record, yet has the potential to offer a shared language and framework in future. The work of GRI, PRI, UNEP, but also by initiatives like Aviva’s benchmarking initiative may offer resolve here. See www.sdgi-nl.org for an early overview of standards and SDG reporting approaches (2016).

3) Governments Have a Powerful ‘Toolkit’ at Their Disposal – The public sector play a powerful role, not just as a policy maker, or regulator, but also as but also as co-investor or buyer, or orchestrator of cross-sectoral action agendas. The report offers a number of high-impact, or innovative solutions for unlocking value. In doing so, watching both the front door where positive change is achieved, and the backdoor – where harm is done is critical, as is ensuring stable, resilient financial systems are in place. At the risk of stating the obvious, the role of local government across developed, emerging, and developing nations is key. The report provides an extensive overview of mechanisms and innovative solutions.

4) And finally –Interim Milestones Are Needed – Bringing in place clear interim SDGI milestones, perhaps even extending Nationally Determined Contributions to cover all SDGs, can help signal a long-term commitment to sustainability and the SDGs, an important lever in minimizing the perceived risks associated to embracing the SDGs and maximizing the perceived value of doing so. Since publication, progress has been made already by groups like the Inter-Agency Taskforce on Financing for Development (www.developmentfinance.un.org)

In closing, the SDGs are everybody’s business. We are grateful to the investors we spoke with for their frank reactions, are highly committed to contribute to this agenda, and are hopeful that our research, convening, and IMPACT PRO technology can help to deepen our JOINT investment and delivery capacity.

Time for a new normal. 

Carolien de Bruin is the founder and CEO of C-Change (www.c-change.io). She formerly led Deloitte’s global impact investing activities from New York, and served as interim COO at the Bertha Centre for Social Innovation & Entrepreneurship in South Africa.

Dr. Maarten Biermans is head of ESG policy and dialogue at Rabobank and co-author of the report and affiliated to Tilburg University. Mr. Biermans is a specialist in impact investing and ESG integration in private equity and an advisor to C-Change.


From The Economist conference “Impact Investing: Mainstreaming Purpose-Driven Finance.”

You can’t manage what you don’t measure, as the adage goes. Big advances are being made in measuring social impact and environmental sustainability thanks to the efforts of organisations such as the Sustainable Accounting Standards Board and Global Impact Investment Network. But what remains to be done? Are the right things being measured? What reporting and auditing rules are needed to create confidence in claims about achieving impact and sustainability? What do we already know about the impact of current investment choices?

Dan Hanson, partner, Jarislowsky Fraser Global Investment Management and founding member, SASB Board

Jessica Matthews, managing director and head of mission-related investing practice, Cambridge Associates

Matthew Weatherley-White, managing director, The CAPROCK Group

Erika Karp, founder and chief executive, Cornerstone Capital Inc

Moderator: Matthew Bishop, senior editor, The Economist Group

Executive Summary

From “How” to “Where” — For many investors, the conversation has shifted from how ESG matters (i.e., performance) to where it matters. When ESG matters to an investment factor, that can have material implications for stock selection criteria.

A Widespread Interaction Between ESG and Investment Factors — A relationship exists between ESG and a multitude of investment factors, including country classification, market capitalization, and various valuation metrics.

ESG Adds Value in Certain Geographies — Because of wide divergences in the quality of corporate governance in emerging markets, ESG-based stock selection can add significant value. In developed markets, ESG-based stock selection has added more value in Europe than in the US.

High ESG Risk Sectors can be Associated with Certain Factors — Some sectors have greater ESG risks than others. “Value” managers investing in sectors with low price to book multiples may unknowingly overweight areas where ESG risks are relatively high, e.g. Materials, Energy.

Figure 1: At the Intersection: ESG and Investment Factorsfactors venn

Source: Cornerstone Capital Group

Our full report is available to clients of Cornerstone Capital Group. Please click here for important disclosures.

Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

Executive Summary

A New GIC. On September 1, 2016, MSCI added Real Estate as a new sector, increasing the number of GICS sectors to 11.

Real Estate through an ESG Lens. A preliminary assessment might suggest that environmental issues are at the forefront in the Real Estate sector. On this assumption, the sector would seem to be positioned relatively favorably in an ESG Materiality Matrix.

A More Complex ESG Footprint. Social and governance factors are material in Real Estate too. As with Utilities, good community relations can have a significant impact on the amount of time it takes to bring a project to fruition. The sector also has many of the same governance issues as Financials, most notably those pertaining to business ethics. This broader view suggests the Real Estate sector’s ESG risk profile is likely among the highest of the GICS sectors.

Figure 1:  Real Estate’s Position in an ESG Materiality Matrix


Source: Cornerstone Capital Group.

Click here for important disclosures. The full report is available to clients of Cornerstone Capital Group.

Michael Geraghty is the Global Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry.

Executive Summary

Evolving ESG Lifecycles. For most sectors, the likelihood of adverse ESG events and their potential financial impacts evolve through a lifecycle. ESG lifecycles determine the time it takes for a sustainability issue to become relevant to a sector as well as the magnitude of the financial impact. We believe the ability to anticipate ESG lifecycles can enhance the investment decision-making process.

A Shifting ESG Materiality Matrix. Reflecting various ESG lifecycles, sectors move around the Materiality Matrix over time. Previously, we estimated the ESG lifecycles of MSCI ACWI sectors for the period 2006-14.

How Might Lifecycles Evolve? Based on an analysis of intangible factors, we estimate how the lifecycles of seven major sectors might evolve over the next few years.

Sector Strategy Implications. ESG risks for Financials seem to be rising given that major governance issues are not receding. By contrast, risks for the Energy sector look set to decline further.

Figure 1: Evolving Lifecycles in an ESG Materiality Matrix
Sectors’ Current Plot Points with Estimated Past and Future Positions


Source: Cornerstone Capital Group

Please see here for important disclosures. The full-length report is available to clients of Cornerstone Capital Group.

Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

Bloomberg, the NYSSA and The CFA Institute recently held a sustainable investing conference titled “Sustainability and Value – Using Data and Valuation to Drive Returns.” The day included panel discussions from a variety of participants including the Chief Investment Officer of the State of Connecticut, institutional asset managers, a partner from Jeff Skoll’s family office, Capricorn Investment Group, a professor from Yale and Stanford Universities, and sustainability professionals from Waste Management, Huntsman Corp. and Lockheed Martin.

There was widespread agreement that following good corporate behavior will lead to uncovering better-performing companies. Whether the data is quantitative or qualitative does not matter, it’s the avenue of inquiry this process stimulates that is ultimately important, and integrating fundamental and sustainable analysis is critical. Currently, there appears to be an opportunity to generate alpha through better access to data. But as data is standardized and the cost of access to this data declines, this alpha will be competed away. At the end of the day, embracing ESG isn’t a yes or no decision, it’s a “way of looking at things.” It is a holistic approach to long-term investing.

Deborah Spalding, the CIO of the State of Connecticut, offered attendees a view from the asset owner’s perspective. A former sustainable finance portfolio manager, Deborah is attempting to integrate sustainable finance into the state’s asset allocation, security selection and asset manager due diligence process. However, public pension plans face challenges to achieving this goal that foundations and family offices do not, such as:

Participants on a panel titled, “Sustainability Factors & Methodologies” discussed how managers incorporate ESG into their process and the usefulness and reliability of current ESG data providers.  While the quality of the data is not standardized across industries and is inconsistent across time periods, participants agreed that it is improving and that having some data is better than having none at all. As with traditional financial data, however, it’s incumbent upon the investor to dig further and not accept ESG data at face value.  As one panel member pointed out, a number of larger well-capitalized companies understand how to present this nonfinancial data. These companies have established the correct committees, have filed the correct forms, etc., in order to rank well in some of the ESG databases. (Volkswagen being the poster child of this dynamic.)  One participant discussed the desire to be able to get behind these numbers – not to have a static presentation where the numbers just sit there – but to be able to drill down and understand how these factors interact.

As investors, the ultimate decision of whether to invest in a security or not does not depend solely on the data; it’s the mosaic an analyst builds from the data that’s the key driver. ESG needs to be embedded into the fabric of the firm through the integration of fundamental and sustainable analysis at the security level, alignment of compensation programs and improved transparency, all to foster a focus on the long term. The CIO of Connecticut’s pension plan stated that achieving this goal may require better integration of the investment people and the programmatic people. At the investment manager level, one participant stated that the market remains bifurcated, with older firms attempting to overlay ESG analysis onto their traditional investment process and newer firms building ESG into their process from the ground up, weaving it into the core fabric of their company.

Bottom line: There was universal agreement that integrating nonfinancial metrics into the investment process helps drive investment into higher-quality companies — it’s how these metrics are integrated into the process that participants are trying to solve for. To cite a traditional and perhaps overused saying, it’s the journey that’s important, not the destination. It’s the avenue of inquiry stimulated by employing sustainable finance factors into the investment process that’s the key to investing in good companies and generating attractive returns.

David Dusenbury, CFA, serves as Managing Director and Senior Portfolio Manager at Cornerstone Capital Group, where he is responsible for strategic corporate business development. He also serves on the Executive Committee and Investment Policy Committee for Cornerstone Capital Investment Management (CCIM).  David has spent 25 years on Wall Street, analyzing and investing in financial services companies.



A growing body of research confirms that investors around the world are incorporating environmental, social and governance (ESG) issues into their investment decision-making.1  Adding to the evidence, a recent study of institutional investors in Canada found that investors do consider ESG issues when making investment decisions. And that’s not surprising considering the growing evidence that sustainability is linked to corporate performance.2

But investors have made it clear they’re not getting the information they need from companies’ securities filings or from their CSR reports. What they want is a clear link between ESG issues and a company’s strategy, risk management and operations.

This doesn’t mean Canadian companies aren’t already considering ESG issues in their corporate strategy, risk management and operational context, and even in their executive compensation programs. What it tells us is that it isn’t coming through in their reporting.

Key Highlights

We surveyed a group of 24 institutional investors representing over $1.7 trillion in assets under management, including some of Canada’s largest pension funds, mutual and pooled funds and other investment managers. The survey was completed by members of the investment team (40%), senior management (30%), the governance team (20%), and one board director. Key takeaways are:

What This Tells Us

The study made it clear to us that there’s a gap between the ESG information companies are providing, and what Canadian investors need to know to make informed investment decisions. So what’s the solution?

There are different ways to approach it. One is to include material ESG metrics in the 10-K or MD&A. The Sustainability Accounting Standards Board (SASB) has already issued provisional sustainability accounting standards for 90 industries in 11 sectors, and a guide for companies to implement them in their 10-K reports.3 The Global Reporting Initiative (GRI) is also providing guidance on materiality.4 Another is to publish an integrated report following the principles of the International Integrated Reporting Council (IIRC). But to date, very few North American companies have taken the leap.

While the concept release issued by the U.S. Securities and Exchange Commission in April 2016 is encouraging,5 it’s likely going to be a while before there’s any change in regulations in the U.S. or in Canada.

So we think investors should be letting companies know what will help them the most. We also think that companies can and should be taking a critical look at their own reporting – MD&A or 10-K, proxy and CSR reports – to make it consistent and useful to the people who rely on it.

Click here to read the full report.

Working group

The 2016 Canadian investor survey was developed by representatives of the following organizations:

•   SimpleLogic Inc.

•   RR Donnelley

•   Canadian Coalition for Good Governance

•   Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management

•  CPA Canada

Catherine Gordon is President and Founder of SimpleLogic Inc., a communications firm that has been bringing clarity to business communication since 1997.

1   Unruh, D. Kiron, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Investing for a Sustainable Future,” MIT Sloan Management Review, May 2016. 2) 2015 study of Environmental, Social and Governance (ESG) Survey. June 2015. 3) https://www.cfainstitute.org/ethics/Documents/issues_esg_investing.pdf. 4) Principles for Responsible Investment member statistics: https://www.unpri.org/about.

2    Corporate Sustainability: First Evidence on Materiality. March 9, 2015. Khan, Mozaffar and Serafeim, George and Yoon, Aaron. hbswk.hbs.edu/item/corporate-sustainability-first-evidence-on-materiality.  From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. March 5, 2015. Clark, Gordon L. and Feiner, Andreas and Viehs, Michael. http://ssrn.com/abstract=2508281

3    sasb.org

4    globalreporting.org

5    SEC Concept Release on Business and Financial Disclosure Required by Regulation S-K – SASB commentary http://www.sasb.org/wp-content/uploads/2016/05/Reg-SK-Key-Messages-FINAL.pdf





Human ingenuity has, over the centuries, created our extraordinary global economy.  Technological progress affords the average citizen of highly developed (i.e., G7) economies a standard of comfort unavailable to even the wealthiest mere decades ago. And the market satisfies evolving consumer wants and needs with supply chains that move people, capital, goods, and services across borders at ever-quickening paces. People around the world are now clamoring to join the middle class.[1]  But academics, policy makers, and leaders in the business and investment communities are increasingly realizing that enabling those lifestyles without significant changes in our production systems could risk our planet’s ability to support us.

As those billions express their aspirations to join the integrated global economy, we who have already enjoyed the fruits of progress must set our sights higher still: ensuring that future economic growth is sustainable and meets “the needs of the present without compromising the ability of future generations to meet their own needs.”[2] Delivering the sustainable economic growth necessary to enable those global citizens to participate fully in a stable, middle-class lifestyle is not a pipe dream, but it will require long-term vision from the economic leaders of today.

Fortunately, both asset owners (that is, providers of investment capital), investment managers, and corporate decision makers have realized that sustainability is a critical consideration in planning for the future.

Asset owners, particularly Millennials[3], aspire to invest their savings in a way that fulfills their values while earning the return that will enable them to achieve the things all savers want: to pay for their children’s education, fund their retirement, and build a nest-egg for their other needs. Responding to this demand, investors have begun shifting considerable assets into sustainably driven strategies. In 2014 more than one out of six (18%) of investment dollars in US equities were devoted to sustainable strategies, doubling the percentage from only a few years prior.[4]

Corporate leaders also aspire to devote resources to those aspects of their business that will build long-term value. They increasingly recognize that sustainability is not an afterthought, but rather is integral to their business. In McKinsey’s 2014 Global Survey on Sustainability[5], the percentage of CEOs who made sustainability their #1 priority has gone from 3% to 13% since 2010. Further, 43% of responding organizations address sustainability because it “Aligns with company business goals, mission, or values,” more than double the percentage from 2010 (21%).

However, investors and senior management still lack the tools to fully integrate sustainability into their investing and management activities. Business leaders properly have the sense that capital investments in sustainability issues may not yield results and investors have seen mixed outcomes from values-driven investing. Recent work at Harvard Business School used SASB’s industry-specific methodology to reveal that the materiality of those sustainability efforts provides the missing piece of the puzzle.

In HBS working paper 15-073 “Corporate Sustainability: First Evidence on Materiality (2015),” Mozaffar Kahn, George Serafeim, and Aaron Yoon applied the SASB methodology (controlling for Fama-French and industry effects) to 45 industries across 6 sectors and showed significant outperformance, in both market returns, and revenue and income growth, to companies that properly distinguish between material and immaterial issues and invest only in the former. In a forthcoming follow-up paper, “Shareholder Activism on Sustainability Issues,” Jody Grewal, Serafeim and Yoon suggest that shareholder proposals on material issues lead to improved performance while those related to immaterial issues may actually be value-destroying to the extent that they push management to devote resources (capital, etc.) inefficiently to sustainability projects that don’t impact business outcomes.

SASB, the Sustainability Accounting Standards Board, has developed standards and metrics for companies to report on only those sustainability issues that are material to investors, and for investors to get the decision-useful information they need to draw meaningful conclusions around performance on these critical issues. Focusing on materiality aligns the aspirations of investors to allocate capital to organizations that meet their criteria for sustainability with those of business leaders to build companies that create long-term value, thereby maximizing the chances of fulfilling the aspirations of emerging consumers to participate fully in global wealth.

 Michael Kinstlick is the Head of Standards Setting Organization for the Sustainability Accounting Standards Board. He oversees research, analytics, consultation, and codification and maintenance of the SASB standards.

[1] “The Emerging Middle Class in Developing Countries” Homi Karas, OECD Development Center Working Paper #285, Jan 2010: https://www.oecd.org/dev/44457738.pdf

[2]“Our Common Future,” 1987 Brundtland Report of the UN’s World Commission on Environment and Development: http://www.un-documents.net/our-common-future.pdf

[3] 82% of HNW Millennials (vs 45% HNW overall) are interested in sustainable investing. (“Investing in the Future: Sustainable, Responsible and Impact Investing Trends,” Morgan Stanley Wealth Management, April 2016:  http://www.morganstanley.com/ideas/sustainable-investing-trends]  See also: “Rise of the Millennials (and the impact on values-based investing)” from Standard Life, October 2015: http://www.standardlifeinvestments.com/WP_Rise_of_the_Millennials/getLatest.pdf

[4] Forum for Sustainable Investing.

[5] McKinsey Global Survey on Sustainability 2014: http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustainabilitys-strategic-worth-mckinsey-global-survey-results




Executive Summary

Intangible Factors Can be Material Too. Most investors focus on tangible income statement and balance sheet items, but intangible factors can be material too.

Analyzing Intangible Factors at the Industry Level. In our report ““ESG in Sector Strategy: What’s Material?”” we developed an approach to analyze intangible factors that can potentially have a material financial impact on sectors. We now apply our approach at the industry level.

Industry Risks are Constantly Evolving. In a subsequent report,“A Shifting ESG Materiality Matrix: What Has Mattered, What May Matter,”  we concluded that the likelihood of an intangible factor having a financial impact, and the potential magnitude of that impact, are constantly evolving. We analyze industry risks associated with intangible factors currently.

Counterintuitive Conclusions. Based on our methodology, Tobacco is currently a less risky industry than Non Alcoholic Beverages. Food Retailers are currently more risky than Investment Banks.

Figure 1:  Ten “Most” and “Least” Risky Industries Currently
Based on Ranking of Intangible Factors

Geraghty Industry Risk fig 1

Source: Cornerstone Capital Group

Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.

Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.


With $218 billion spent annually on food that is not eaten, great potential exists to invest today in methods that will pay off by eliminating tomorrow’s losses.

In 2015 Betsy and Jesse Fink, through the support of the Fink Family Foundation and over a dozen other foundations, helped launch a new nonprofit initiative, ReThinking Food Waste through Economics and Data (ReFED). ReFED recently published a monumental new report on food waste, spearheaded by impact investment firm MissionPoint Partners with analysis led by Deloitte and Resource Recycling Systems (RRS). A Roadmap to Reduce U.S. Food Waste by 20 Percent defines the investment potential for the most promising solutions to reduce wasted food; it is available for download along with Key Insights and a Technical Appendix at www.refed.com.

The Solutions

The Roadmap’s economic model evaluates and ranks 27 solutions for two essential qualities: diversion potential and potential to create “economic value,” defined as the aggregate financial benefit to society (consumers, businesses, governments, and other stakeholders) minus all investment and costs. Solutions generally fall into one of three categories: prevention, recovery for human consumption, or recycling. Top Roadmap solutions include:

refed pic 1


Pound for pound, prevention presents the highest return on investment and benefit, avoiding 2.6 million tons while generating an annual $8 billion of system economic value. Recovery approaches such as donation-matching software, donation tax incentives and safe donation regulation can create $2.4 billion in economic value every year. Composting and anaerobic digestion can capture a whopping 9.5 million tons from major metro regions alone, with system economic value estimated at an annual $121 million.

While the system economics of recycling solutions are not as competitive on a per-ton basis as seen in the cost curve, the economics for individual recycling facilities can be very profitable. In-sink grinders in households, in addition to other onsite solutions, in large metropolitan statistical areas may take advantage of existing wastewater recovery infrastructure and show potential to divert 1.6 million tons annually.

ReFED’s Marginal Food Waste Abatement Curve

refed pic 2

Source: ReFED Roadmap to Reduce U.S. Food Waste by 20 Percent (refed.com)

Non-Financial impacts

Benefits like greenhouse gas (GHG) abatement, job creation and resource conservation provide indirect financial benefits. Roadmap solutions abate
18 million tons carbon dioxide equivalent (CO2e), valued at $1 billion ̶ $4 billion.[1] The creation of 15,000 direct jobs, mostly related to recycling and recovery, supports a circular economy and yields significant direct, indirect and induced economic impacts.

refed pic 3


Altogether, Roadmap solutions will demand $18 billion to reduce food waste by 20% over the next decade. These investments will also generate over Financing the Roadmap

$100 billion in economic value to society. This investment will only be made by mobilizing and deploying market-rate, government, and philanthropic capital needed and ensuring it’s channeled to prioritized investments. ReFED calls for the formation of impact investment funds with the sole focus of aggregating funding sources, de-risking new innovations and alleviating barriers standing in the way of projects that have yet to attract capital.

Prevention solutions require primarily self-funded corporate financing, potentially with support from private equity and impact investment that can act to lower internal hurdle rates. Consumer education campaigns and standardizing date labeling, as well as many recovery practices, rely far more heavily on the support of public and philanthropic grants for additional investment. Recovery solutions are in need of nearly $9 billion in investment to return $24 billion over a decade. The biggest opportunity exists for donation tax incentives, with other recovery solutions being best-suited for philanthropic investments through grants and impact investment. Recycling solutions will require a diverse range of financing; capital-intensive projects such as composting and anaerobic digestion frequently rely on private project and corporate finance or private equity, but also look to public dollars in the form of government subsidies, tax incentives and public project finance and grants in order to reduce risk.

Sources of Financing

refed pic 4

Source: ReFED Roadmap to Reduce U.S. Food Waste by 20 Percent (refed.com)

An Investment in our Future

ReFED’s goal of a 20% (13 million ton) reduction in the short term as part of a larger US goal of 50% (32M tons) by 2030 requires prioritization, time and brainpower. ReFED has specifically called out four critical tools necessary to achieve the Roadmap vision: 1) the right types of Financing, 2) Policy at the municipal, state and federal levels, 3) technological and business model Innovation, and 4) Education for employees and consumers. Two things stand out if this effort is to be successful. First, a general awareness of the benefits and costs should clarify the value of action. Second, the most important outcomes close the loop between food waste and feeding the world — whether preventing waste in the first place, feeding more people through enhanced donation and recovery infrastructure, or creating new fertility-enhancing soil amendments — the end result is the same. We improve the ability of our food systems to feed the world.

JD Lindeberg is President and CFO of Resource Recycling Systems Inc., in Ann Arbor, MI, which consults with government entities, universities, hospitals and private businesses on their recycling programs and materials use.

[1] EPA estimate is $10-55/ton GHG. 2016 paper in Nature Climate Change by Stanford’s Moore and Diaz estimates $220/ton GHG.




Recidivism is a fundamental idea in law enforcement.  Past bad behavior, sometimes even in unrelated fields, tends to predict an individual’s proclivity to cross the line in the future.  Might the same insight hold for irresponsible ESG behavior of a firm?  Will a company’s record of violations related to worker welfare, product safety or environmental damage predict reporting shenanigans?

To evaluate this conjecture in the corporate context, my co-authors (Shuqing Lo and Simi Kedia) and I combined ESG data from several sources for 4,621 unique firms spanning the years 1994 to 2011.  Product safety data comes from the Food and Drug Administration (FDA).  Information on worker safety and worker civil rights is drawn from four different federal government agencies, which include the Mine Safety and Health Administration (MSHA), the Occupational Safety and Health Administration (OSHA), the Office of Federal Contract Compliance Programs (OFCCP), and the Wage and Hour Division (WHD) of the Department of Labor (DOL).  Environmental violations are collected from the Environmental Protection Agency (EPA).

As hypothesized, we found that a firm’s prior noncompliance record on ESG activities is statistically associated with the likelihood of subsequent financial misreporting measured as (i) a material earnings restatement; (ii) the issue of a subsequent Accounting and Auditing Enforcement Release (AAER) by the SEC; or (iii) the violation of disclosure laws or GAAP (Generally Accepted Accounting Principles) alleged via a securities class action lawsuit.  Although all these misreporting outcomes are serious, an AAER is issued by the SEC only for the most egregious cases of accounting misconduct.

Before you conclude these are small unknown companies, let me tell you that the persistent ESG violators tend to be older, larger and more profitable.  Pfizer, Waste Management and Caterpillar feature among our top violators.  Caterpillar has been charged with recurrent violations of the Clear Air Act.  Pfizer has been labeled a “repeat offender” by the DOJ, has pleaded guilty to illegal marketing of drugs, and has faced allegations of bribery of foreign officials.  Waste Management has been accused of violating antitrust laws, labor contracts, and environmental regulation.  Interestingly, all these firms have either restated their books or have been hit with a lawsuit for violating GAAP or an AAER in future periods.

The statistical patterns we observe are economically important as well.  A one standard deviation increase in ESG noncompliance relative to its mean is associated with a 12.5% increase in the likelihood of a restatement, a 25% increase in the likelihood of an AAER, and an 11% increase in the likelihood of a private class action lawsuit.

So, why do we observe this statistical association?  We suspect that the cultural forces driving ESG violations influence financial misreporting as well.  A cultural climate in which corporate leadership looks the other way when violating an environmental rule is perhaps a few steps away from tacitly endorsing cooking the books. These are usually environments where the unstated message from leadership is that hitting the financial target or getting the job done is much more important than the means of getting there.  New employees to the firm initially get co-opted into this line of thinking.  A slippery slope of small but repeated increases in unethical behavior eventually leads to a hardened attitude whereby employees rationalize such behavior by telling themselves, “everyone else in our industry is doing the same thing.”

The remarkable finding is that the firm’s culture, as opposed to the impact of a few errant CEOs, explains the data better.  Even when we look at firms where CEOs have been replaced, the firm’s ESG noncompliance record predicts future financial reporting risk.  Hence, “bad barrels,” or a persistent culture at the firm, as opposed to “bad apples,” or ethically challenged CEOs, are more likely to drive our findings.

So, keep an eye on how companies treat their stakeholders (workers, the environment, their communities and of course their customers).  A firm’s ESG record can serve as an early warning about serious offenses such as fraud down the line.

Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at the Columbia Business School.  He is widely published in finance and accounting journals. His research is frequently cited in the popular press, including The Wall Street Journal, The New York Times, Bloomberg, Fortune, Forbes, Financial Times, Businessweek, and The Economist.


There is ample evidence that our minds consistently distort our perception of the world when making decisions under uncertainty, even within our own constructs of reality. Distortion in perception can stem not only from differences in experience and education but also the necessary use of heuristic judgments.

We use heuristics[1] — mental shortcuts that help us to make decisions in complex or uncertain situations without exceeding our cognitive capacity — in our work and daily lives. Like many shortcuts, however, heuristics do not always yield accurate results.

In the early 1970s, psychologists Amos Tversky and Daniel Kahneman found that the employment of heuristics results in cognitive biases that lead people to make “systematic and predictable errors” when making judgments under uncertainty.[2]

One well-known heuristic, “anchoring and adjustment,” stems from estimating a (usually numerical) value from a relevant initial value by adjusting therefrom.[3], [4] The use of this heuristic leads to a consistent bias in making judgments, as adjustments from the anchor are typically insufficient to arrive at an accurate value.[5]

An example: Asked if the population of Colombia is more or less than 10 million, and then asked to estimate the population, most will estimate that it is closer to 10 million than the correct figure — approximately 48 million.[6]

An anchor may be created to intentionally exploit this bias. A retailer may, for example, advertise a significant “mark-down” from an artificially inflated retail price, luring shoppers, through the false promise of a bargain, to buy more.

Another heuristic that relies on the availability of relevant information will skew one’s assessment of the probability of an event occurring. In some cases, availability bias stemming from the retrievability of an instance — how readily it is recalled — alters one’s perception of the likelihood of an occurrence.
For example, we might inaccurately perceive a higher crime rate in an area merely by having witnessed or heard of a recent crime.  Imaginability — how easily we can imagine an occurrence — can also lead to availability bias.[7]

The anchoring/adjustment and availability biases can both cause people to overemphasize the importance of past information. It may not be surprising that people tend to underemphasize the probability of events that are relatively less visible or those that occur relatively infrequently. Conversely, we tend to overemphasize the probability or frequency of an occurrence that looms large in our consciousness whether due to availability or imaginability.

Take auto accidents versus airplane crashes: Rarely do the former make big news, precisely because they are so frequent and kill or maim only a few people at a time. Though relatively rare, airplane crashes result in hundreds of fatalities at a time, can decimate whole communities, and often linger through dozens of news cycles. In this case, imaginability and retrievability may work in concert to lead us to overestimate the likelihood of one’s dying in a plane crash as opposed to an auto accident.

Cognitive Bias Related to Corporate Sustainability Issues

Anchoring/adjustment and availability heuristics may be particularly prevalent within the realm of corporate sustainability or attention to environmental, social, and governance (ESG) issues. The fact that awareness of these concepts in business management is not yet widespread means that relevance of ESG issues to financial performance are still unclear to many investors and company managers. Lack of familiarity with ESG issues (irretrievability and unimaginability) can skew downward perceptions of their associated risks. Conversely, over time many companies have become increasingly attuned to the materiality of certain ESG issues to their business and focused on them in public reporting; in this case, heuristics can lead to elevated perceptions of ESG risk.

Can Widespread Use of Integrated Reporting Counter Cognitive Bias?

Context would seem to be critical in countering cognitive biases, wouldn’t it?

In the retailer example above, if nearby shops are offering the same product at an undiscounted price that is lower than that of the “discounting” shop, consumers may be less likely to buy more from the latter. The anchor loses its impact in the context of the competition, and the market operates as it should.

Integrated reporting is intended to provide the context that is so critical for stakeholders, primarily investors, to make informed decisions vis à vis the reporting entity. Done relatively well, an integrated report presents both performance and strategy within the broader societal, economic, and environmental context in which the company operates. An integrated report is most useful to investors when it demonstrates how the company is deploying and conserving not only financial but a variety of other capitals: natural, human, manufactured, intellectual, human, social and relationship.

The Value Creation Process

rebernak diagram

Capital inputs and outputs in the value-creation process, taken in the broader context in which a company operates, are important components of integrated reporting. Source: IIRC.

If only one or two companies within a sector engage in integrated reporting, however, we may have an anchoring problem. Moreover, estimates of the broader operating context may be skewed via unavailability of relevant, accurate information. Investors, particularly those less schooled in the application of ESG factors to investment processes, might make assumptions regarding performance that are based on a dearth of relevant information.

Companies should be able to provide context and relevant information sufficient to defend their own assumptions around their performance. The more companies that do, the better investors will be able to make informed decisions. An integrated approach to public reporting is one vehicle for doing so. Likewise, investors will serve themselves and their clients by being attuned to potential biases embedded in information they receive from companies as well as their own heuristics and biases.

Indeed, we could all benefit from awareness of our very human tendency toward cognitive bias. We must always question our assumptions. In doing so, we have enormous opportunity to make better decisions in all human pursuits.

Then again, what’s “better” depends on where you start.

Kate Rebernak is the founder and CEO of Framework LLC, a specialty management consultancy that helps companies create value by understanding, managing and communicating performance on environmental, social, and governance issues that are likely to have direct and indirect financial impacts on their business.

[1] Wikipedia describes a heuristic as “any approach to problem solving, learning, or discovery that employs a practical method not guaranteed to be optimal or perfect, but sufficient for the immediate goals.” Merriam-Webster defines heuristic as “involving or serving as an aid to learning, discovery, or problem-solving by experimental and especially trial-and-error methods.”

[2] A. Tversky and D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science (Washington, DC.), 185, 1124–1131 (1973).

[3] Ibid.

[4] “Behavioral Finance: Cognitive Errors – Information-Processing Biases, CFA Tutor, https://cfatutor.me/2013/10/03/behavioral-finance-cognitive-errors-information-processing-biases/.

[5] A. Tversky and D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science (Washington, DC.), 185, 1124–1131 (1973).

[6] As of 2013. Source: the World Bank.

[7] A. Tversky and D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science (Washington, DC.), 185, 1124–1131 (1973). Tversky and Kahneman noted that “the risk involved in an adventurous expedition, for example, is evaluated by imagining contingencies with which the expedition is not equipped to cope.”




The idea behind sustainable and responsible investing is to invest in companies that reward shareholders with strong financial returns as well as deliver positive environmental, social and economic impacts.  Beyond explicit sustainable investing, more and more stakeholders are expecting companies to marry purpose with profits and to do more good for society.

When it comes to the betterment of human health, such as raising the state of physical, mental and social well-being, this responsibility looms large, and the inputs, outputs, and impacts may be difficult to pin down.

Until now, this challenge has been met by accounting for social impacts in buckets of negligence or malpractice, such as human rights violations, occupational injury and illness, child labor, slavery, and the like.  As such, the business case for well-being translates into avoiding reputational risks and ensuring that legal and regulatory requirements are met.

In this pursuit of simplicity we miss the forest for the trees.  We effectively skip over all the “good things” that human well-being generates, like mastery, autonomy, purpose, good health, safety, security, trust, and belonging.

Moreover, well-being is greater than the sum of its parts.  Well-being is a true reflection of a system that operates in a sustainable and healthy way: a business system that places well-being as central to its purpose, products, people, and the planet; that commits to developing human potential with opportunities for learning, progress, and collaboration; and that builds resilience for an evolving dynamic system by deliberately elevating the absorptive and adaptive capacity of individuals.  In sum, we may appreciate and generate thriving if we value these things as much as, or more than, grievances or violations attached to various business activities.

Measuring the Forest

Now is the time to focus on the forest—the positive impacts on well-being that businesses consciously create. This pivot in attention could be the engine that drives social impact, the economy and civic engagement.  If this is so, how do we measure it?

Researchers in the SHINE program at the Harvard Center for Health and the Global Environment have been busy working with companies to measure their well-being handprint — changes that companies cause to happen beyond doing business as usual.

Working with Johnson & Johnson, a participant with SHINE, our researchers have developed well-being metrics that connect the dots between the internal business operating environment, well-being (engagement) and performance (productivity).  SHINE is using these measures to survey employees and take a pulse on the culture of well-being within the company and its effects on the business.

For companies motivated by measuring improvements in well-being, such as Owens Corning, these proof points may help to set priorities and align strategy.  At EYP Architecture and Engineering, these metrics may translate into environmental features or building designs that improve human well-being.  For Levi Strauss & Co, the idea of measuring well-being in the supply chain is tantamount to making the communities in which they operate thriving and healthy places to live and work.

Every June, these companies and others come together at the SHINE Summit to learn and share the science and business of handprint accounting—how companies measure positive environmental and well-being impacts—and to cheer on the race to the top organized by a NetPositive strategy, a deliberate intention to do more good than harm in the world.  Altogether, this is a collective system for thriving.

In a recent book review, Peter Senge wondered: “What if growing our people was the true strategic core of the enterprise?” In the same vein, I wonder whether maximizing human capital is fundamental to sustaining all other capital resources (see Capitals, a report by the International Integrated Reporting Council that explains how 6 capitals of business—financial, manufactured, intellectual, human, social and relationship, and natural—are affected and transformed by the activities and outputs of an organization).

If human potential is core to the sustainable future of business, can well-being metrics capture the business impact?  Research on well-being would say so.  A recent study by Alex Edmans examined companies from the annual “100 Best Companies to Work For” list published by Great Place to Work Institute and found that the profitability of companies that valued and developed their employees outpaced the sector benchmarks.

Studies that have measured well-being, including those inside SHINE companies, have shown that higher levels of employee well-being are associated with better productivity and performance, such as less lost work time or unhealthy days, better engagement, and increased job satisfaction.

While individual improvements in well-being may accumulate to collective impact at the organizational level, the holy grail for the SHINE well-being studies is to “fingerprint” a thriving culture and climate according to its unique features.  For stakeholders, including consumers, employees and investors, this global measure of company well-being could be the key to thriving at work and become the gold standard for integrated reporting.

Well-Being: More than Wellness

A sticking point for successfully implementing a well-being strategy that is hard-wired to the business operating system is that well-being is often confused with wellness programming: individual programs that target employee health behaviors such as exercise, smoking, nutrition, health care utilization, etc.  Traditional wellness programs often narrow the focus on individual behavior and trade off corporate responsibility for employee responsibility.

The shift to well-being changes the emphasis from what employees should be doing to what companies can be doing to ignite higher order change at the system level.  For a well-being strategy, health programming is only one part of the approach.  The business goal for well-being is to first invest in human capital rather than to aim to reduce health care costs.  Studies have shown that raising employee well-being enables better lifestyle choices that return better health and, ultimately, lower health care costs.  At the same time, businesses that invest in growing human capital achieve returns on talent acquisition and retention through operational efficiency, quality, and brand reputation.

Can we agree on measuring, managing and reporting on well-being?  SHINE companies believe this idea already has legs and is running through the forest!

Eileen McNeely teaches at Harvard T. H Chan School of Public Health. She is Co-Director of SHINE at the Harvard Center for Health and the Global Environment. SHINE works with companies to test new methods and develop the evidence base for positive impacts on people and the planet. She has extensive experience in health policy and environmental and occupational health.


Integrating ESG Factors to Enhance Investment Decisions: Summary

A First Step. Material sustainability issues matter to investment performance. While there is no consensus about the weight to be given to ESG factors in investment decisions, we take a first step in addressing the issue.

A Rudimentary Approach. We estimate how much of regions’ and sectors’ valuations are attributable to ESG factors, and base our ESG weights on those attributions.

ESG Weightings. ESG factors have an 18% weighting in our regional strategy model, and a 9% weighting in our sector model.

Strategy Implications. There are no changes to the rankings in our regional or sector strategy models as a result of the ESG weightings that have been introduced.

Figure 1:  Integrating ESG Factors to Enhance Investment Decisions

Geraghty weightings cover graphic

Source: Cornerstone Capital Group


Click here for important disclosures. Our full report is available to clients of Cornerstone Capital Group.

Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.



Executive Summary


Geraghty charts 1.2 Feb. 22 16


View or print important disclosures here.

Michael Geraghty is the Global Markets Strategist at Cornerstone Capital Inc. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

Sustainability and the IRO – The Data Challenge

A conversation at Bloomberg with Erika Karp, founder and CEO of Cornerstone Capital Group, and Greg Elders, senior ESG analyst with Bloomberg Intelligence

Investors say they need measurability and predictability around ESG factors. Are they getting it? Elders points out that the usage of ESG data has risen 50 percent per year since Bloomberg launched its ESG product in 2009, with around 20,000 regular users today. Karp points to the importance of the Sustainability Accounting Standards Board, where she’s a founding board member, as well as the GRI and IIRC.