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.”