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Measuring Corporate Sustainability for Smarter Sustainable Investments

A New York Times article by Andrew Ross Sorkin pondered whether a company’s corporate responsibility can be measured; and, if so, should investors care?

Measurabl – pun intended – was founded upon the belief that sustainability is not only measurable, but doing so credibly would differentiate companies by lowering their risk profile and helping them achieve superior returns through lower operating expenses. In short, we want to make it easy to measure what matters for companies and investors.

Investors are using sustainability metrics

According to a report from Bank of America Merrill Lynch Global Research, companies in the top fifth of environmental, social, and governance (ESG) ratings experienced the lowest volatility in earnings per share (32%); however, companies with the worst ESG performance averaged an astounding 92% volatility. The correlation between EPS stability and ESG performance is real.

Investors are convinced and now acting upon these trends. In BlackRock CEO Larry Fink’s annual letter, he states “Environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts” and suggests that BlackRock prefers organizations that measure, manage, and report on ESG.

So, how do companies measure and report credible ESG data?

Traditional ranking systems like DJSI, GRESB, and CDP request ESG information they deem relevant through an annual survey. These ranking systems vary vastly on what to measure and how much to weigh different metrics, leading to confusion among both reporters on what matters and investors on who to believe.

“It is unlike a bond credit rating where agreement is fairly tight by the rating agencies. In my view, it is more similar to a broker’s sell side report where different sell siders will disagree – it’s an opinion,” wrote Benjamin Yeoh, Senior Portfolio Manager of Global Equities at RBC Global Asset Management, in a LinkedIn post responding to the Sorkin column.

The existing ranking process creates incentives to “chase points” instead of creating real improvements. Meanwhile, these systems lack a vetting process to ensure the claims are accurate. It’s no wonder that less than 30% of investors trust sustainability data released.

A Better Standard For Comparison

In the wake of the ESG certification craze, it’s time we hold our rankings to the same standards with trustworthy data.

Enter: Investment Grade Sustainability. Investment Grade Methodology holds sustainability data to the same standards as financial data and highlights quality of data reported. This creates incentives for increased accuracy and transparency while ending the points chasing regime of current processes.

The key criteria of an Investment Grade Methodology for scoring real estate assets and portfolios are:

  1. Open Source: Any entity may access and apply the method for calculating investment grade scores for assets and portfolios.
  2. Free: There is no direct cost to get a score. There may be fees for getting the underlying data third party verified, which must be a prerequisite for certification. However, no one organization should have exclusive dominion over issuing certifications.
  3. Data Driven: Each input into the score – meter, asset, entity – should be objective and based on verifiable information.
  4. Transparent: The score must be released; there’s no point in pulling this together if no one knows the results.

The first-ever Investment Grade Sustainability Reports, representing $560 billion worth of assets, were released earlier this year, ushering in the next era of sustainability in the built environment. As these trends continue, expect Investment Grade sustainability to rise to the forefront of measuring corporate responsibility.