Total time: 9:07

Jessica McHugh: Welcome back to The Hitchhiker's Guide to ESG investing. High-quality, transparent, standardized data is key to creating a sound environmental, social, and governance investing strategy. So today we're going to talk about organizations that collect and analyze ESG data. I'm Jessica McHugh, marketing communications director here at Sage. And today I have with me Emma Harper and Andy Poreda, two of Sage’s ESG research analysts. How are you guys doing today?

0:31

Emma Harper: Good, thank you.

0:33

Andy Poreda: Hi, Jessica. Thanks for having us.

0:35

Jessica McHugh: Let's start off by talking about the ESG data provider landscape. How many organizations today are providing information about companies’ sustainability, and environmental, social, and governance data?

0:47

Emma Harper: Yeah, so I looked into this more recently because over the past several years, we've heard about how many ESG data providers there are, and back in 2016, it was around 125. But upon further research, there's about over 600 ESG data providers globally at this point. So you can really see the growth from 2016 at around 125 to over 600 today. It's basically just exploded.

1:15

Jessica McHugh: Wow, that is enormous growth – over 600 ESG data providers today. So at some point, we're going to see this space mature, right? Are we seeing signs of that now?

1:26

Emma Harper: Yeah, so there has been a ton of consolidation. Just to name a few, the most recent I believe was the Morningstar final acquisition of the remaining 60% of Sustainalytics. That just happened. They had 40%, and they went ahead and did the remaining 60% on that. And MSCI has been doing acquisitions, which is another large data provider in the space. S&P Global of S&P rating agency has done their own acquisitions of RobecoSAM and TruCost. So there's a ton of consolidation in this space. And I think, S&P and Moody's and Morningstar, gathering up these ESG data providers, you can really see a change in attitude happening here from the major rating providers that understand that ESG data is not going anywhere. It's important. And it's something that they obviously are deeply incorporating into their own analysis and reading. So that's something exciting to see, I think.

Jessica McHugh: And what type of information are they collecting from companies and how are they collecting this information?

2:34

Andy Poreda: Well, Jessica, there's a lot of good information that the companies have access to, and there's a lot of overlap amongst all of them. I would say that the first thing is that companies are going to be looking at for the ESG ratings are, what information is publicly released by that company. And so we'll find that the ESG analysts are looking at things like the 10K, sustainability reports, and any other information that is put out by that corporation. The other thing that we also find that companies are looking at is publicly available information, such as press releases or Glassdoor information that they can find and get off of the internet. But then the third area is they will actually privately engage with companies, having them fill out surveys. RobecoSAM is an example of that they have for years given these companies surveys, and then gathered information off those responses and then used that as a key component of their of their scoring.

3:26

Jessica McHugh: So these ESG data providers are looking at a mix of information – data that comes directly from companies themselves, articles about the companies, and then sometimes they're engaging directly with the company.

3:37

Andy Poreda: I think the big thing is that a lot of these companies use the same information, but how they come to their conclusions is – you really have to look at the methodology as to how they’re weighting their scores, what they're using to come to their final conclusion because they have access to a lot of the same information. But in the end, it's how they interpret it and what is the most material issues from an ESG perspective.

4:03

Jessica McHugh: And so because the ESG data providers have sometimes differing methodologies and how they rank a company or an industry, are you seeing a lot of differences in the ratings or ESG rankings of companies?

4:17

Andy Poreda: I think sometimes we will see the ESG rating agencies aligned on various companies. But there are a lot of times where we actually something called score divergence, where MSCI may have a company rated as a AAA, which indicates it's their top-rated company, but then Sustainalytics will have it within their risk score that it is a considered a high-risk company. And then ISS, which we use, may also then come and give it a score, like a C-. And so we have to do a lot of analysis as to why they come to those conclusions, because sometimes it's not always what is readily apparent. And so a lot of the work that is done from us at Sage is to kind of look into that information to see why there is a difference.

5:02

Jessica McHugh: So we have access to a lot of this information. And Sage really understands the differences and similarities of how the ESG data providers analyze companies. How is Sage further analyzing this data about companies? What is most important to us?

5:19

Emma Harper: We actually look at governance and intentionality as being the two things that are going to make for a solid leader versus its peers in terms of ESG. And what we mean by that is if a company has good governance or as well governed from the core, it's more likely to care about its society that it operates in, its employees that it hires, and then also the environment at large. And so it really starts from a core, well-governed company. Then also we want companies that are well intentioned, so we want companies that are looking to improve. They may not be perfect right now, but they have the right intentionality to become better in the long run and become even more sustainable in the long run. So those are the two, I would say, most important aspects that we look at. And then we go from there.

6:14

Jessica McHugh: And how does Sage distill our analysis into an easy way for investors to gauge the sustainability of a holding or portfolio? Could you tell us about the Sage ESG Leaf Score?

6:27

Emma Harper: So as I talked about, governance and intentionality are certainly part of the Leaf Score framework and analysis. We also look at financial materiality of different ESG factors when we're looking at leaf analysis. And really the most important part of the Leaf Score is the fact that it is an easy-to-understand system. It's a 1-to-5 rating system and where we look at one-leaf issuers as ESG laggards all the way up to five-leaf issuers that are considered ESG leaders. And we wanted it to be understandable for our clients to not put numbers or letters or all kinds of different rating systems on statements. We wanted it to be, here's a one leaf or here's a five leaf, and you can really tell where these issuers are from an ESG perspective in terms of our Sage view. And so that's really the impetus of why we wanted to create the Leaf Scores, because we didn't want to have it be kind of this confusing, nebulous, you know, number or something out there. We wanted it to be easily discernible and understandable for our clients.

7:37

Jessica McHugh: So it sounds like there are many data providers to choose from, but we're starting to see some consolidation here as the industry matures. Sage has provided insight into how we use ESG data to create our own proprietary Sage ESG Leaf Score, so that our clients can quickly determine the level of sustainability of holding our portfolio. As always, thank you for listening. You can find us on sageadvisory.com and @sageadvisory on LinkedIn and Instagram.

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