What actually is sustainable investment (or ESG) research?
You think you know. We thought we knew. But do we actually? Can we define sustainable investment (or ESG) research in better terms than "if it looks like a duck..."? Does it matter? (Spoiler: Yes, it probably does matter, a lot).
What research is not
- Research is not the same as 'DATA'.
- Research is not the same as '(ESG) RATINGS'.
- Research is not the same as 'ANALYTICS'.
While these three are all important information-related products and services within the sustainable investment landscape and all have parallels in 'mainstream' investment practice, they differ from research in one critical respect: they do not explicitly ask or answer investment questions.
They are not, therefore, directly comparable to 'mainstream' investment research (typically written by sell-side analysts that recommends whether to BUY this stock or to SELL that stock. Nor (to bring back the sustainability / corporate governance dimension) do data, ratings or analytics present reasoned arguments as to why investors should vote FOR or AGAINST resolutions put to company AGMs.
My questions (RSVP via this discussion group: Research practices & value chain or to
- Which firms write the best investment RESEARCH on climate transition?
- Who are the influential (individual) analysts at these firms?
(... particularly if you have ideas on the Basic Materials, Electric Utilities or Oil & Gas sectors)
Do we actually need a precise definition for sustainable investment research?
In one respect, NO. It doesn't really matter.
If it looks like a duck, swims like a duck and quacks like a duck, it probably is a duck…
We … sort of … know what sustainable investment looks like … because we know what 'mainstream' investment research looks like and we can extrapolate … and because we have seen some of what is produced.
In another respect, YES. The existence and flow of research matters fundamentally to the health of sustainable investment because it informs and develops a debate about which aspects of sustainability matter how much to which investors and why. It guides decisions over what DATA to seek, how to weight RATINGS and how to apply ANALYTICS meaningfully.
If we develop any of these other information services without robust research underpinning, we run the risks of:
- Seeking DATA that investors can't actually use
- Weighting RATINGS in a way that doesn't reflect the context or models of the companies being rated
- Evaluating portfolios with tools that ANALYTICS tools that mislead around the significance of exposure
Worst of all would be if we allowed ourselves to believe these derivative information services were actually RESEARCH themselves and that somehow we could reverse-engineer answers to unspecified questions by simply throwing enough data at the wall and seeing what sticks.
… but it might be a goose or a chicken … or a duck-billed platypus
So, because - at SRI-Connect - we are currently engaged in a process of articulating - for a number of corporate clients - who the opinion-formers (fundamental RESEARCH analysts) are on the topic of climate transition (and specifically on shareholder resolutions on the topic), we have taken it upon ourselves to articulate what we think sustainable investment research is … and how we think it differs from other sustainable investment information services.
The characteristics of sustainable investment research
(Differentiating characteristics, IMHO, in bold italics)
At SRI-Connect, we define sustainable investment 'RESEARCH' as forward-looking analysis that uses human judgement or evaluation to combine contextual information with data with the aim of answering a specific, articulated, idiosyncratic question about the suitability of investment in a defined asset (or group of assets) or the desirability of taking other investment-related action.
How it differs
As such, RESEARCH differs from three other information-related services to investors (which are often loosely - but somewhat unhelpfully grouped under the heading 'research'):
- 'DATA' services - which involve the presentation of qualitative or quantitative information without analysis or judgement
- 'RATINGS' - which involve the scoring or comparing companies against their peers with regard to (typically) notional standard of sustainability performance or 'risk'
- 'ANALYTICS' - which involve the application of data to portfolios to measure their exposure to sustainability issues that the companies they are invested in are exposed to
Our next steps
- 1] To hear what you, dear SRI-Connect community, think and to adjust our definition based on your feedback
- 2] To make visible the (currently largely invisible) investment influencers on climate change for the benefit of: [a] the quality of the wider investment debate on the issue and [b] a proxy season that is characterised (in respect of climate change) by enlightened conversations between intelligent individuals rather than by heated debate in the media.
- 3] To track this journey of discovery through iiiCC blogposts on Invisible Investment Influencers on Climate Change.
