If fund managers are serious about clean investments, they need to get their hands dirty.
That's the view of Sasja Beslik, head of sustainable finance at Swiss bank J. Safra Sarasin, as demand surges for companies that perform well on environmental, social and governance (ESG) issues.
He himself has turned ESG detective in the past, flying to southern India after reading studies that found high water pollution levels around some factories mass-producing medicines.
Accompanied by a cameraman, Beslik spent 10 days meeting villagers and taking samples from streams close to the plants supplying companies that his then-firm had invested in.
He said his samples were confiscated by airport authorities, but that he sent his video evidence of foaming scum in streams to 27 international and local companies with operations there.
"We got a response in a week from all of them," he said, adding that most were keen to fix the problem. Returning to India a year later, he found many of the factories had "improved the capacity of the water-treatment plants".
Beslik's visits were in late 2017 and 2018, but he says it's now more important than ever to probe ESG credentials, rather than relying on ratings assigned by data providers that are often based on self-reporting by companies.
Investor demand for companies deemed to have high ESG standards has never been higher. ESG-focused funds manage $1.1 trillion, more than double 2016 levels, according to industry tracker Morningstar.
As much as anything, such investments are a way to mitigate risk; Bank of America estimates more than $600 billion of S&P 500 company market capitalisation alone was lost to "ESG controversies" in the last seven years.
Recent high-profile examples include German payments firm Wirecard and British fashion retailer Boohoo, where allegations of accounting fraud and factory labour abuses, respectively, erased years - and in Boohoo's case, months - of returns in a matter of days.
Wirecard collapsed into insolvency in June after disclosing a 1.9-billion-euro hole in its accounts. Boohoo launched an independent review of its supply chain in July and defended its business practices, following newspaper allegations about low pay and poor conditions at suppliers' factories in the city of Leicester.
Beslik, who heads a team of eight ESG specialists at J. Safra Sarasin, is now focusing on Democratic Republic of Congo to assess mining of cobalt, a key component of batteries used by tech firms and carmakers. The cobalt industry has been dogged by allegations of child labour and environmental damage.
He is by no means the only player turning ESG sleuth, reflecting the shifting demands of the investment industry.
Vontobel Asset Management's head of ESG, Sudhir Roc-Sennet, employs three ex-investigative journalists to bolster his traditional team of analysts. A central element of their job is kicking the tires on ESG scores.
One example concerned Nestle. Despite the firm's AA ESG score from one provider, Vontobel became concerned in 2018 about media and NGO reports of excessive water use at Nestle's U.S. bottled water subsidiary.
Roc-Sennet remains invested in Nestle, praising its overall environmental track record. But after consulting water rights lawyers, hydrogeologists, and environmental inspectors, Vontobel pushed Nestle to reduce water intensity - the amount of freshwater used per million dollars of sales.
It's unclear whether Vontobel's efforts led to Nestle reducing its water intensity, which had been falling for years across its businesses.
Nestle said the amount of freshwater used per bottle at the U.S. subsidiary was one of the lowest among beverages and its "team of engineers, hydrologists, biologists and geologists consistently monitors and cares for the springs and local environment in California".
Headline ESG scores can miss such issues, Roc-Sennet said.
"The water division is small and Nestle's other business is sustainable," he said.
When data isn't available, basic detective work is the answer, he says.
To assess diversity among senior management at companies, for example, he has scoured the web to check "thousands of photos and names, doing Google and LinkedIn searches on people's backgrounds".
‘In the first innings’
Providers of ESG scores, including Sustainalytics, MSCI and Refinitiv, which is part-owned by Reuters News' parent company, say that alongside company disclosures they use external sources including media and NGO reports. Some, like Truevalue Labs, say they eschew company data altogether.
But the system has flaws.
Small companies with limited disclosure can earn lower scores than multinationals, meaning relatively new renewable energy outfits might rank below tobacco giants.
Scores can also vary wildly across providers. In contrast to credit-ratings agencies, whose assessments vary significantly in just 0.1% of cases, one in four ESG ratings differ between providers, according to Nathan Cockrell, Lazard Asset Management's co-director of global research.
Take Tesla - its environmental scores range from 10% to 65%, where 100% is the best possible score, according to a 2019 study by Anthony Renshaw at financial intelligence firm Qontigo. Tesla can rank both above and below rivals Ford and General Motors.
Another example is Saudi oil firm Aramco. It is rated an average BB by MSCI but carries an ESG risk rating of "severe" from Sustainalytics.
Boohoo scored highly across some providers when the newspaper investigation lopped nearly 50% off its share price in three days. That was despite long-standing media allegations of issues in its supply chain.
Simon MacMahon, head of research at Sustainalytics, acknowledged ESG scoring relied on information that was "quite incomplete, sometimes inconsistent and sometimes of low quality", but said methodology had improved.
"ESG as an industry is still maturing ... We are in the first innings of a nine-innings game," he said.
An MSCI spokesperson said ESG ratings should be one of many factors investors use while conducting due diligence, and are not investment recommendations.
Many managers subscribe not just for headline scores but to access underlying research and data, ESG data providers say.
But gaps and inconsistencies are spurring some fund managers to determine ESG credentials for themselves. This may involve investigating basic assumptions.
Railways usually rank highly on ESG metrics because of low carbon emissions, but Hans Stegemann at Triodos Investment Management found out his fund was invested in a Canadian rail firm that transported shale gas and oil.
They sold their stake, Stegeman said, adding: "There was no positive (ESG) impact."
A company's culture can be crucial, yet is difficult for scoring systems to evaluate.
Sharon Bentley-Hamlyn, investment director at Aubrey Capital Management, said a little digging can help verify management claims. Impressed by British concrete paving firm Marshalls, Aubrey visited their quarry in the Scottish town of Falkirk.
"We found great attention to detail, talked to employees and found them very proud to be working for the company. They had invested heavily in systems for health-and-safety training," she said.
Yet ESG screening can, in the short-run at least, conflict with maximising returns - Boohoo shares are still up 120% from 2017. Managers who ditched tech stocks after 2015 on concerns about data privacy and cobalt supplies missed a huge rally.
Beslik of J. Safra Sarasin said inconsistencies between ESG scores and reality could ultimately leave investors exposed.
"There is a huge gap in the world of ESG investing," he added. "A gap between what ESG investments stipulate that they do and what is really going on on the ground. One day it will boomerang back and it will hurt the entire industry."