ESG groups try to thin a thicket of sustainability metrics – Financial Times

Two of the leading initiatives trying to make corporate America pay more attention to sustainability and social issues are joining forces, in the hope of thinning a thicket of new metrics that companies say is overwhelming them with requests for information.

Just Capital, a group founded five years ago by the hedge fund manager Paul Tudor Jones, says it will start using metrics developed by the Coalition for Inclusive Capitalism in its rankings, which gauge US companies by the issues that Americans tell pollsters they care about more than shareholder returns.

The partnership will focus initially on improving disclosure of workforce issues such as employee turnover rates, diversity policies and gender pay equity. According to Just Capital’s polls, Americans see workers as companies’ top priority, with shareholders at the bottom of the list. 

Investors’ appetite for more responsible ways of doing business has attracted $30tn in assets to sustainable investment vehicles, but also a welter of conflicting standards for judging corporate behaviour.

As environmental, social and governance considerations have moved up investors’ agendas they have been presented with a host of new attempts to measure such intangible concepts, from cross-industry bodies such as the Global Reporting Initiative and the Sustainability Accounting Standards Board’s to niche single-issue groups, setting up a battle to see which will dominate. 

Lady Lynn Forester de Rothschild, founder of the Coalition for Inclusive Capitalism and a director of Estee Lauder, told the Financial Times the cosmetics company’s sustainability office was struggling to answer scores of different investor questionnaires.

“Currently, over 150 ratings systems exist, covering over 10,000 sustainability performance metrics, that are trying to fill in the gap that is left by the lack of a generally accepted standard.”

In April, Just Capital released a study showing that companies that disclose their diversity and parental leave policies or the difference between what it pays men and women generate on average 2-3 per cent higher returns on equity than those that do not.*

“For us, it’s about value, not values,” said Cyrus Taraporevala, chief executive of State Street Global Advisors, a Coalition member. “It’s easy for this to spin into an ethical discussion or a morality play and it’s not that for us. This is about how we engage with a company in order to maximise returns.”

Ways of measuring and encouraging more responsible business were important for investors to address a “perception that capitalism isn’t working for everyone today,” Mr Taraporevala said, but he cautioned: “I’m not so sure it’s going to be so easy to choose one framework any time soon.”

The model Just Capital is adopting emerged from the Embankment Project on Inclusive Capitalism (Epic), a partnership between EY and the non-profit Coalition. Participants such as fund managers BlackRock and Vanguard, large pension funds, and companies including Johnson & Johnson and PepsiCo have begun incorporating its recommendations into their mandates or their disclosures to shareholders.

Epic’s calculations will also feed into a Just Capital exchange-traded fund, which was launched a year ago with Goldman Sachs Asset Management but has so far attracted just $124m in assets under management.

Carmine Di Sibio, chief executive of the auditor EY, likened the clashing sustainability metrics to financial disclosures before corporate reporting began to be standardised after the Great Depression.

The proliferation of initiatives has also left many executives and investors feeling overwhelmed, and a recent Rockefeller Foundation survey found that a third of asset managers believe the lack of agreed measurements is holding back the growth of impact investment, one subset of the sustainable investment industry.

Mr Di Sibio predicted more co-ordination would follow. “The more we have all these different organisations coming together and at least focusing on similar actions, the better off we’re going to be,” he said.

“There is an opportunity to present much more of a concerted front behind this new vision of capitalism,” added Martin Whittaker, Just Capital’s chief executive officer.

The agreement between Just Capital and Epic will be announced at a meeting of pension funds, asset managers and corporate executives on Wednesday, which is billed as an effort to agree on a common approach to the challenge of making capitalism “work for a more diverse set of stakeholders”. 

Mr Tudor Jones said he had seen a “titanic” change in attitudes among investors and executives on ESG issues. “When we first started five years ago, it was like talking to Mount Rushmore — just stone faces,” he said. “Now I’d say things have really changed and they’re changing at a breathtaking pace.” 

Lady de Rothschild added: “It is impossible to say that inclusive capitalism has been achieved when you have 60 per cent of Americans saying the system doesn’t work for them. That’s the bad news. The good news is that there’s clear interest from asset owners” in more inclusive models.

*This article has been amended to correct the date of the Just Capital study

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