While prospective investors will always look to a company’s financial performance before making decisions, a growing number are considering nontraditional, non-financial factors before a stock purchase to avoid sudden value loss caused by environmental, social or governance (ESG) crises. GMI earlier this month launched GMI Analyst platform, a research platform to provide corporate stakeholders with ratings of public company ESG risks.
“The number of firms using ESG disclosure is fairly rapidly increasing, they’re taking a very proactive stance,” said GMI CEO Jack Zwingli in a recent interview about the new metric. “All they have to do is look at BP, at NewsCorp, at Massey, to see that it’s not just the finances that pose very serious risks. They need to recognize that ESG concerns do impact risk in the long term.”
The GMI Analyst platform is the flagship product of the corporate governance research firm forged in December by the three-way merger of GovernanceMetrics International, The Corporate Library and Audit Integrity.
“With this merger we are in a great position,” continued Zwingli. “We were a little bit like kids in a candy shop. We have a tremendous amount of info, the question was how to drill it down into a product that people can use, understand and apply. We started at a high level and drilled down to the underlying data. Future versions will layer in additional content, tools for peer comparisons, advanced searches and screenings, more company and information coverage. We’ll continue to make the product easier to use and more informative.”
The service currently offers risk analyses for more than 20,000 corporations, including most large and mid-cap firms and some small cap companies, with 4,200 of those containing a more specific research-based ESG risk rating. The organization identified and tracks over 50 ESG+ (with the plus sign standing for “accounting transparency”) metrics that are most likely to affect performance.
The GMI Analyst also complies with the United Nations-backed Principles for Responsible Investment (PRI) initiative, providing PRI investors with an efficient comparison utility. Over 900 investors and investment funds have signed on with PRI since its launch in 2006.
“Of course, the trickle-down effect is now corporations are looking at the nontraditional measures of performance, and are recognizing that the investors are asking more about ESG,” explained Zwingli. “Recent statistics show that 80 percent of the Global Fortune 250 now all report on ESG.”
GMI joins a growing number of organizations evaluating companies’ ESG risk ratings, including Institutional Shareholder Services’ ESG Solutions. ISS, an MSCI brand, uses findings from MSCI’s ESG Research department in its proxy assessments. MSCI’s team includes over 70 dedicated ESG analysts and researchers. Glass Lewis’ Risk Monitor also tracks and provides alerts for possible risk red flags.
The Global Reporting Initiative, which produces a sustainability reporting framework, finds that the number of companies using this reporting framework is steadily increasing internationally, with a 22 percent increase from 2009 to 2010 after a 34 percent increase from 2008 to 2009. Companies in the financial services and energy industries had the highest numbers of reports.
In addition, the Carbon Disclosure Project (CDP), recently issued a report produced in conjunction with PwC finding that companies reporting climate change policies as an integral part of their strategy doubled, up from 35 percent of respondents in 2010 to 65 percent in 2011. Board or senior executive oversight of climate change programs increased as well, with 87 percent of responding companies delegating oversight to the highest levels of the organization.
The GMI service, Zwingli said, can be used in many different objectives, from boards seeking peer comparisons, to investors, to insurers seeking a quick risk evaluation. “It’s a very pragmatic view for the corporation to look at these factors, know what the ratings are, all investors are using ESG-type research to evaluate company performance and standards.”
Since some of the ESG+ metrics are of a more subjective nature than traditional financial performance metrics, “Companies may disagree with us,” noted Zwingli. “But it’s still valuable to say to investors ‘we have a copy of the report, and we have a different story.’ And that’s fine, that’s their prerogative. You can then be proactive about it, and include in disclosures that we looked at the report and disagree with it and why, or are planning on improving on these measures.”
Zwingli encourages companies to remember that ESG risks can be as devastating to a company as financial difficulties: “Reputational risk can have a high cost of capital. Companies are very concerned with reputational risk, and don’t want to show up on the front page of the Financial Times or Wall Street Journal.”