Emerging Sustainability Accounting and Investment Methodologies Dig Deep

Investors frequently assess companies based on their sustainability data, but corporations currently lack a standardized and widely accepted framework to share that information. As major fund providers like Vanguard, State Street, and BlackRock push for better ESG disclosures, new methodologies are emerging.

One is an industry-specific disclosure framework from the Sustainability Accounting Standards Board. SASB’s deputy director of research David Parham recently told Environmental Leader that the independent private-sector standards setting organization plans to finalize the framework later this year.

“We just finished a public comment period on what we put out as the final changes that would make it into the standard, based on years of outreach, stakeholder outreach, talking to companies, investors, and third party experts,” he said.

Several companies have begin using SASB’s indicators for their reporting, however. They include JetBlue, Kilroy Realty, Host Hotels. There is competitive motivation to ensure that companies are communicating their full value proposition to investors, Parham says.

New Scientific-Based Method

Another emerging sustainable investing framework is being developed by the City University of New York (CUNY) and Harvard University in partnership with UBS Asset Management.

The university researchers came together with UBS Asset Management two years ago, Dinah A. Koehler, a research specialist on the sustainable equities team at UBS Asset Management, told Environmental Leader. They sought to develop science-based methods for evaluating how a range of technologies can have a positive impact related to climate change, air quality, water, human health, and food security.

“We leveraged recent advances in several scientific disciplines — including Earth observation and modeling, epidemiology, and public health — and linked these data to corporate data on products and services that can contribute to more sustainable environmental and human systems,” Koehler says.

The framework differs from SASB’s in three key ways, she explains. Rather than operations and supply chain, the metrics focus on products and services sold. The metrics also try to measure changes in natural capital and human capital. In addition, the framework uses the same models and scientific research underlying major US environmental laws, such as the Clean Air Act.

The group worked to identify technology clusters, such as water metering tech and drugs to treat breast cancer, and then develop science-based “conversion factors” for each cluster. These factors are the relationship of impact on human well-being, the environmental benefits, or both per unit of revenue, Koehler says. The framework was then tested on companies held in a $2.1 billion portfolio of public equities managed by UBS Asset Management on behalf of a large European pension fund.

“The aim was to provide systematic, transparent, and verifiable metrics of success based on well-accepted scientific approaches,” Koehler says. “In 2015, the United Nations adopted its 17 Sustainable Development Goals without knowing how to measure progress toward them. Our hope is that our research can provide metrics for the majority of them.”

ESG Disclosure Benefits

When the stock market took a massive dive recently, a Morningstar analysis showed that sustainable funds actually tended to perform better than other funds. Although they fell, too, the losses were in many cases less severe. For investors, this signaled that companies with effective ESG practices and management tend to hold up better during market turbulence, Morningstar’s Jon Hale pointed out.

Also this month, ING published a report that surveyed 210 finance executives from US-based companies across major sectors with revenues from $500 million to more than $20 billion, asking about the impact of their sustainability strategies.

“The most mature firms in the research — those with an enterprise-wide sustainability framework in place — reported better borrowing and revenue outcomes than peers,” the report found. “Sustainability strategies are being deployed as true revenue drivers.”