Asset managers look to raw NGO data for ESG insights

Some investment professionals are turning to the raw data collected by non-governmental organizations to inform their opinions on corporate ESG (environmental, social, and governance) performance, rather than relying on black-box ratings from index providers.

“We are more interested in raw data than we are in ESG ratings. We would rather draw our own conclusions based on raw company data that is either disclosed by the companies themselves or collected by third parties like NGOs,” says Mason Gregory, associate director of investment solutions at MFS Investment Management.

Providers like MSCI and Sustainalytics offer ESG ratings, which are intended to help investors measure a company’s resilience to ESG risks. These providers use proprietary methodologies to identify companies that score well on ESG exposures, and those that do not. These methodologies, of course, are not public, and each provider inevitably encodes certain biases in the ratings, weighting different ESG factors in particular ways according to their own priorities, says Gregory, who specializes in ESG and sustainable investing at MFS.

Relatively raw data from NGOs allows investment professionals like him to make those decisions for themselves, and apply their own weights.  

NGO data can be gathered directly from an NGO itself, which can be a time-consuming process, or from a data provider that compiles reports from a number of different NGOs. Ratings providers themselves draw on NGO data. Data from NGOs like Global Fishing Watch is accessible in Bloomberg’s Professional Terminal. Last year, Refinitiv signed a contract with Sigwatch, a UK-based provider of global NGO and ESG issue tracking and reputational impact data. The collaboration gives Refinitiv customers access to insight into NGO campaigns affecting more than 19,000 companies, brands, and projects, and Refinitiv is enhancing its due diligence reports with Sigwatch data.

Gregory says firms can also gather NGO data from watchdog groups that issue reports on supply chain controversies, such as cocoa supply chains that include forced child labor issues. The NGO Mighty Earth provides a free Cocoa Accountability Map which combines cocoa supply chains from nearly every major cocoa and chocolate company operating in the Ivory Coast.

Mike Chen, director of equity and head of sustainable investments at PanAgora Asset Management, says the firm is in the early stages of looking into how NGO data can be used for ESG analysis. He agrees that rating a company on ESG is an individual, personal, and values-based process. “There’s no right or wrong; it’s like asking someone what their favorite color is. I think therein lies the problem of using commercial ratings—you’re accepting somebody else’s decision for you,” he says.

Companies that might be controversial to an investor might score surprisingly well on ESG factors with a ratings provider, Chen notes. For example, Sustainalytics gives tobacco company Philip Morris a medium ESG risk rating, while MSCI—which scores ESG from a scale (from worst to best) CCC, B, BB, BBB, A, AA, AAA—gives them a BBB rating, also the middle of the road. Chen says a company might market an unhealthy product like cigarettes, and score poorly on the “S” pillar of ESG, yet score highly on G because it has a diverse board with many women in positions of leadership. The company has also pledged to create alternatives to tobacco cigarettes.

“But does a good governance structure offset the fact their product contributes to the deaths of millions of people? According to me, no,” Chen says.

Someone with their own values, life experiences, and goals may see the company in a different way from their peers. “That’s why using ratings is very problematic because you are outsourcing your own decision about what matters to you, to other people,” Chen says.

Chen says that when collecting ESG data, it’s important to not only look at surface-level datasets. “When people think about diversity, people think about gender; that’s the most obvious thing. And that data is relatively easily available,” he says. But there’s more dimension and nuance to gender diversity data than the sum of a person’s X and Y chromosomes. Chen says investors need to consider socio-economic background, nationality, ethnicity, age, and education level to get a different dimension to diversity.

Using raw data straight from the NGOs gives PanAgora the opportunity to draw its own conclusions on whether a company should be included in a particular ESG portfolio. Chen says that these types of data are more useful to him when compiling an ESG-based portfolio than pre-packaged information from an ESG ratings agency.

“If an NGO puts out a report that a certain company has bad employment practices, or a company has been polluting, we read that data and then decide how important or relevant those reports from the NGO are to the way we view ESG,” Chen says.

Both PanAgora and MFS still use ESG rating agencies alongside their own methods of data collection. Gregory says investors can still get raw data from aggregators, but that he finds the actual company ESG ratings less useful, “We often don’t agree that the issues driving them are the most material for a particular company,” he says.

Chen says PanAgora practices multi-factor investing. A multi-factor model is a financial modeling strategy that draws on multiple factors to analyze and explain asset prices, so Chen can draw information from NGO data, newspaper reports, the company’s own reports, and sell-side analyst reports to inform the investment process. “Any decision to buy or sell a given company is not based on one information source alone. Then once you have all these raw ingredients, you’ve got to synthesize it into how you want to weight each piece of information,” he says.

Gregory says another advantage of the data that NGOs collect is that it’s often unique. Organizations like the Workforce Disclosure Initiative, for example, collect salary information on global companies that isn’t available anywhere else, he says. The WDI aims to improve data on how companies manage workers across their operations and supply chains. In 2020, 141 global companies took part in its annual survey. “A lot of this data is not information that the companies voluntarily disclose, or if they do disclose it already, it’s not typically that detailed,” he says.

NGOs also collect data regardless of the cooperation of the corporate entities whose ESG performance asset managers want to understand. That removes a lot of the bias involved in corporations’ own reporting, which still forms a substantial portion of the ESG data that the buy side relies on.

In addition, ratings from the big providers tend to be “backward-looking,” Gregory says, particularly regarding controversy. In 2015, the US Environmental Protection Agency said Volkswagen had violated environmental laws by selling cars in America that cheated emissions control tests. The resulting scandal was dubbed Dieselgate, and it tanked the auto manufacturer’s overall ESG rating, Gregory says.

After Dieselgate, MSCI downgraded Volkswagen to a CCC rating, the lowest rating the provider offers, and the company now has a B rating (only one rating higher than CCC). “You can decide to punish a company for what they have done in the past, but as active investors we have an obligation to focus on the future and try to understand how a company is likely to perform going forward,” Gregory says.

This is where the results of an ESG ratings agency can be unhelpful for an asset manager looking to see not what a company has done in the past, but how they are positioned for the future. “We are focused on understanding how ESG performance on various issues is likely to impact the sustainability of a company over the long term from a financial perspective,” Gregory says.