The Architecture of ESG

By Emil Efthimides 21 July, 2010

Will Bloomberg ‘s ESG tool change disclosure or investing? Bloomberg’s Emil Efthimides explains to China Water Risk that tackling disclosure gaps revealed by their ESG Disclosure Score is the next challenge.

Bloomberg’s current universe of 3,500 companies disclosing ESG data is expected to grow
ESG Disclosure Score could help distinguish between two financially similar companies
Emil Efthimides
Author: Emil Efthimides
Emil Efthimides manages Bloomberg’s Environmental, Social and Governance data project.  He has 16 years’ experience with Bloomberg’s equity fundamentals, having managed European research and the company’s Quality Assurance department.  He also developed the company’s oil and gas and mining fundamental data prior to his current assignment.  He has an MBA in Finance from Fordham University in New York and the Chartered Financial Analyst (CFA) designation.
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Bloomberg chairman Peter Grauer, at the recent Responsible Investors conference in New York, staked Bloomberg’s role in driving responsible investment. The media group, Grauer was quoted as saying, will work towards integrating Environment Social and Governance (ESG) issues into the “decision-making process of the capital markets.”

In 2009, Bloomberg bought environmental data provider New Energy Finance and released the ESG Disclosure Score– a tool that ranks a company’s ESG disclosure. The score ranges from 0 for companies that do not disclose ESG data to 100 for those that disclose every datapoint collected by Bloomberg. Each datapoint is weighted in terms of importance and also tailored to industry sectors. Its most recent scoring was released this March 2010. The tool contains data on water such as water consumption, wastewater, discharges, and water intensity.

Will Bloomberg pushing ESG convince investors of ESG’s value? Will this change the face of investing? China Water Risk interviews Bloomberg’s ESG data manager Emil Efthimides, who explains that the next challenge is tackling the disclosure gaps revealed by their ESG Disclosure Score.

CWR:  How does Bloomberg see its role in driving the trend towards responsible investing?

Emil: As a financial data provider Bloomberg makes available raw data which money managers and analysts use every day in making investment decisions.  By adding ESG data to our platform we add new, different and important metrics to the standard arsenal of financial ratios and measures, which our users have at their disposal.  It is said that financial statements provide about 20% of the relevant information on a company.  ESG measures seek to cover the remaining 80% of extra-financial data.  It can help distinguish two companies which are very similar financially, but which may have significant differences in their carbon footprint, workforce practices and board of directors’ policies.  All of these may not be reflected in the company’s current financials but could significantly affect its future outlook.

A year ago, on July 1, 2009, Bloomberg launched its ESG product.  We now have the raw data of ESG for companies around the world; we know which companies disclose and which do not.  We also know there are many gaps in the data.  Very few countries require mandatory disclosure.  Our next challenge is to fill in those blanks, by aggressively contacting companies with our survey, and by considering ways to evaluate even those companies that refuse to disclose.

CWR: How do you view the ESG disclosure trend?

Emil: We envision ESG disclosure only growing in coming years.  In the one year that we have been researching ESG, we have seen public awareness of ESG issues increase and along with it pressure on companies to disclose ESG data. Projecting this trend into the future we expect the current universe of 3,500 companies that disclose ESG data to grow exponentially going forward.

CWR: What are the main challenges to disclosure?

Emil: The main obstacle to disclosure is that it is not mandated by law in most countries. Where we have excellent disclosure, as in Japan, it is because the government requires it.  That said, the trend is in our favor.  For example, in the United States the Securities and Exchange Commission issued guidance on Jan. 27 requiring disclosure by companies of any climate-related impacts on their business.  Although this measure does not require disclosure of specific items such as greenhouse gas emissions, it is a move in the right direction.

CWR: What are the challenges in standardizing ESG data?

Emil: Because disclosure is not mandated, companies disclose as they see fit.  Chances are that if it does not make them look good they will not disclose.  As a result many data points are reported differently by different companies.  Ultimately it is up to our analysts’ judgment to include or exclude a particular disclosure, and our analysts by now have looked at hundreds if not thousands of company reports.

CWR: Are there are issues with the end users of the data?

Emil: There are two distinct groups among Bloomberg users.  The core group of users for ESG data is the traditional SRI or socially responsible investor.  They are familiar with ESG, have been using it for years in their investment process and are enthused about Bloomberg entering this space.  Beyond that group is the mainstream investor.  We see Bloomberg’s role as helping to bridge the divide between SRI and mainstream.  We have done that by integrating ESG data into all the Bloomberg analytics.  When you screen data on our Equity screener (the EQS function) or relative value screener (RV) or when you download data from the Bloomberg to your proprietary Excel model, you can use the 114 ESG data points and 62 ESG ratios right alongside all our other price data, fundamental data, financial ratios and anything else on our database.  Through a sales campaign we have reached out to all our users to let them know ESG is on the terminal.  We want to be at the forefront of ESG data integration, and think it is quickly going from niche to mainstream.

CWR: Of the three, which data (environmental, social and governance) is most difficult to procure and standardise?

Emil: Social data is hard to come by.  This is information on a company’s workforce, and companies are very cautious to release this.  We look for data on employee turnover, workforce accidents, the existence of policies on health and safety.  We understand a company’s sensitivities about releasing this information, and we realize that short of a regulatory requirement to disclose we will continue to face hurdles.

As for standardization, emissions data can be disclosed in a variety of units of measure.  More importantly, we need to have data for the consolidated company as a whole, and often companies disclose a patchwork of local and country data.  Again, it is up to our analysts to decide what to take in and what to leave out.  If the national regulatory bodies ever require standardized disclosure of emissions data, it would take a lot of the fun out of our work!