Despite the growing popularity of investments focused on doing good, or at least on doing no harm, there is no industry standard for advisors to use when assessing and comparing stocks, mutual funds or ETFs for impact, sustainability or ESG (environmental, social and governance) factors. Moreover, many companies don’t disclose that information.
(Related: Clients Clamoring for ESG Investing Advice)
“Everyone uses a different definition,” says Scott Sacknoff, CEO of SerenityShares, a Washington, DC-based RIA and sponsor that launched its own sustainable ETF, the SerenityShares Imapct ETF (ICAN) in April. “There are over 100 different methodologies, all proprietary, so you really can’t compare how it’s being done.”
And the data for those analyses is often lacking because many publicly traded companies don’t disclose sustainability data on their corporate reports.
SASB, the Sustainability Accounting Standards Board, which sets standards for corporate sustainability disclosure, analyzed 713 annual Securities and Exchange Commission filings from companies for fiscal 2015 in its own 2016 annual report and found that about 60% either filed no disclosure or a boilerplate one, while 20% used a company-tailored narrative. Less than 24% of disclosures used some type of metric, but they weren’t standardized and lacked comparability from one industry to the next.
Sustainability and ESG disclosures are “subjective, based on self-reported data …. and a year-and-a-half old,” says Hendrik Bartel, CEO of TruValue Labs, which has developed a counterweight, an AI-based platform that allows asset managers, asset owners, wealth managers and research analysts to assess sustainable investments on a real-time basis.
Sacknoff and Bartel are taking two very different approaches to the problem of defining and disclosing exactly what a sustainable investment is.
A Sustainable ETF That Doesn’t Use ESG Rankings
SerenityShares ETF (ICAN) focuses on what Sacknoff calls the “solution,” the products and services of companies that address six basic challenges to “make the world a better place to live in,” according to its literature.
They are resource scarcity, society (housing and medical care, safety and security), environmental stewardship, living a healthy lifestyle, new initiatives (such as green transportation) and empowerment (micro loans and education infrastructure).
Within each are category are multiple themes, called pillars, such as those in parentheses above, of which there are a total of 20. The ETF also excludes tobacco, fossil fuel and big seed companies like Monsanto.
Unlike other ETFs, SerenityShares does not include companies based on ESG rankings, though it will use an ESG overlay in proxy voting. “ESG is complicated. Companies and funds are using different measures. We’re not doing that.”
SerenityShares ETF is marketed as a diversified core holding, with roughly 115 stocks (selected form the 6,500 listed on the Nasdaq and NYSE), representing multiple sectors and categories. No stock has a weighting of less than 0.5% or more than 3.5% in the portfolio, which is rebalanced quarterly and reconstituted annually. It debuted in mid-April on the NYSE with a 50-basis-point expense ratio and currently has just over $2.5 million in assets.
An AI and Big Data Platform for Creating Sustainable Portfolios
TruValue Labs takes a very different approach from SerenityShares to developing sustainable portfolios. Its Insight 360 Platform digs deep into available data on 8,500 publicly traded companies on a real-time basis using artificial intelligence and big data to develop ESG scores.
Advisors and wealth managers, asset owners such as family offices, asset managers and research analysts can use the data to analyze and compare individual stocks for sustainability purposes, create separately managed sustainability portfolios based on those analyses and monitor those holdings. The platform currently can’t analyze entire funds or ETFs, only their holdings.
TrueValue Labs’ Insight360 platform develops its analysis by accessing objective data from the internet, including news stories, tweets and other social media, then applying SASB’s materiality standards to those disclosures to assess their impact on a company’s operating performance or financial conditions. Additional SASB standards can also be applied.
The platform extracts more than 1 million data points per month from more than 75,000 sources, including news sources, looking for “objective, real-time and non-self-reported data” on such topics as biodiversity, child labor and corporate governance.
It “reads like an analyst on steroids, to figure out what’s going on in a sector, industry and company in order to create an ESG view of a company,” says Bartel.
The findings can be surprising. A demonstration of the platform showed that Tesla rated half as high as Ford for employee health, safety and well-being, while Ford’s rating on waste and hazardous materials management fell recently because of a paint primer spill into Lake Erie.
Clients can customize which SASB categories they want to analyze and overlay stock charts on specific findings to create custom portfolios. The platform is being marketed to “the full buy side” of firms, including asset managers, pension funds and advisors, as well as rating companies, says Bartel. State Street is a customer, and the platform is offered on the Thomson Reuters Eikon service. The flat-fee cost is in “the low tens of thousands of dollars annually,” says Bartel.
TruValue Labs is also working on adding analyses of fixed income securities, private equity and other asset classes to its platform.
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- ESG Makes Companies More Attractive to Big Investors
- How ESG Funds Have Changed Corporate Behavior
- Top 10 Best Performing ESG Funds of 2017: Morningstar