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:

  • Absent or incomplete ESG data that are often incomparable across firms, industries and sectors;
  • Too much immaterial information, including from ESG data vendors;
  • A perception of high costs associated with gathering and analyzing data;
  • A big cap developed markets data bias, particularly toward Europe.

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:

  • Raw ESG data;
  • Thematic and industry analyses;
  • Sustainable indices; and
  • Company ESG ratings and scores.

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:

  • Environmental data relate to emissions, water, waste, energy, and operational policies around environmental impact;
  • Social data relate primarily to employees, products, and impact on communities; and
  • Governance data relate to board structure and function, firms’ political involvement, and executive compensation.

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:

  • In the Energy and Transportation sectors, environmental issues tend to be very material.
  • In the Basic Materials sector, the impact of business activities on local communities is a key issue.
  • For the Retail sector, the ESG policies and practices of companies’ suppliers are important.
  • In the Financial sector, governance policies typically have most significance.

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:

  • Behavioral and demographic – Shifting consumer preferences and willingness to pay based on changes in income and habits;
  • Regulatory – Upcoming regulations that could drive changes in investment; or
  • Technological – Technological innovation that materially impacts key drivers such as revenue, costs and market share.

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:

  • Quality versus quantity. The paucity of material data, and the surplus of immaterial information, frequently hinders effective analysis.
  • A path toward standards. The cost to companies of collecting data on a multitude of ESG topics has been an ongoing issue, with the proliferation of ESG surveys by data providers only complicating the situation.  Another implication of the lack of standards is that there is still a need for time-consuming cross-checking of ESG information by investors looking to integrate ESG analysis into the decision-making process.

[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



[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


[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.