ESG Considerations and Questions for Investors
As they make their investment decisions, investors may want to consider the following aspects of ESG information.
Consider how the ESG information was developed
Understanding how this information was developed is important in determining which additional factors should be considered before relying on the information. For example, if investors are using the information to compare carbon emissions across an industry, it will be important to understand the differences in calculation of the metric from one company to another to understand if the amounts are comparable. Investors should understand that ESG information is typically collected, analyzed, and presented differently from financial information. ESG information can be measured and presented in many different units of measures and collected and analyzed through systems and controls that are typically outside those that generate financial reporting. It is important for investors to consider whether the company has robust policies and procedures in place to promote consistency and quality of ESG information.
Consider whether the information is standardized
Standardized information can help investors understand the calculation and comparability of metrics across companies. If the information is not standardized, investors may want to consider whether this calls into question the relevance and reliability of the information.
Consider the reliability of the data
When evaluating the reliability of the data, investors may want to ask the following questions:
- From where am I getting the data? From the company directly? From a data aggregator? From a ratings agency? What is the governance structure around the data from the provider?
- Does management disclose its processes for preparing and presenting this information?
- Was the metric prepared and presented in accordance with a standard and/or a framework?
- Has the metric been disclosed consistently year over year? If so, was the calculation the same each year?
- Has third-party assurance been provided on the information? If so, by whom (e.g., engineering firm, independent accounting firm, environmental firm)? What was the level of assurance (e.g., reasonable vs. limited)?
- What are the qualifications of the assurance provider, and what does the assurance incorporate (e.g., some non-CPA firms qualify the assurance and say they are not opining on the accuracy of the data)?