“Not everything that counts can be counted and not everything that can be counted counts,” was once said by William Bruce Cameron in reference to measuring human behaviour. Given how much of investing centres on human behaviour, this pearl of wisdom seems to have good application to the field. While one should still try to measure what can’t be counted, it is good to remember that the factors with the largest impact might be those that are difficult to distil down to a single number.
This is especially relevant when evaluating Environmental, Social and Governance (ESG) data and incorporating it into an investment process. As asset managers, we spend a great deal of time determining the value of a company and assessing the risk of investing in that company. ESG is an important part of this. However, not all companies disclose decision-useful information despite a notable increase in sustainability reporting globally.
A KPMG survey¹ found that in 2020, 80% of companies globally report on sustainability. Blackrock noted2 in their 2020 survey of clients that 53% of respondents cited poor-quality ESG data as a barrier for them to adopt sustainable investing: a classic case of just because something is counted, doesn’t mean it counts.
There are over 600 ESG disclosure standards, which makes comparability and even accountability extremely difficult.
What’s more, Ernst and Young estimates³ that there are over 600 ESG disclosure standards, which makes comparability and even accountability extremely difficult. Thankfully, there has at least been increasing regulation on what needs to be disclosed. This can be seen in the proposed JSE Disclosure Guidelines, the Security and Exchange Commission’s Climate Disclosure requirements and the International Sustainability Standards Board coming out with global sustainability disclosure requirements.
This is incredibly useful and a great first step towards getting companies to think more holistically about how they create value. However, it still leaves us with unquantifiable risks. For instance, the amount a company spends on their community does not necessarily tell us about the impact of the spend on that community or whether there are underlying issues brewing. What it does tell us is that a company is keeping track of that metric. This is at least a good start, but more in-depth measurement and reporting is required.
Some metrics that can be measured are dependent on human behaviour. Take the carbon tax for example. As per Climate Action Tracker⁴, a carbon tax of at least $135 per ton of CO2 equivalent by 2030 on the majority of GHG emissions is required to limit global warming to 1.5 degrees. Given the increasingly divergent views on balancing climate action with energy security, it’s unclear what level carbon prices will get to. What we can say with certainty is that South Africa’s carbon tax will need to increase from current levels of around $9 per ton of CO2 equivalent. This is still far below the levels required to limit global warming to 1.5 degrees. The point being that we must ensure that what we can count, is made to count!
The fact that what can’t be counted counts means that integrating ESG into an investment process can sometimes fall more into the art than the science part of investing. That doesn’t make it any less important than the other, more quantifiable parts.
¹KPMG, The Time Has Come: The KPMG Survey of Sustainability Reporting 2020
²BlackRock, Sustainability goes mainstream: 2020 Global Sustainable Investing Survey
³Ernst & Young, What to watch as global ESG reporting standards take shape
⁴Climate Action Tracker, State of Climate Action 2021: Systems Transformations Required to Limit Global Warming to 1.5°C