Dow Jones & Co is one of the originators of corporate sustainability assessment and ESG ratings, having introduced the Dow Jones Sustainability Indices (DJSI) back in 1999 – which in its current guise of the S&P Dow Jones Indices continue to offer sustainability performance benchmarks for companies and investors (having been divested more than a decade ago to a strategic partnership led by S&P Global).
The financial intelligence provider and publisher of The Wall Street Journal has now launched a new sustainability data set covering thousands of publicly traded firms, which combines reported data with worldwide media coverage. Aimed at the asset manager community, Dow Jones sees potential to adapt the service for other investor groups.
The New York-headquartered firm’s recent survey of 200 financial leaders found significant growth potential in sustainable investing, but also serious challenges around data scarcity. Survey respondents cited the opportunity to drive positive change as the primary growth driver, followed by fiduciary responsibility and new regulation. More than half (56%) of financial professionals said traditional ways of valuing companies are inadequate for assessing sustainable investments. A similar proportion said the quality of ESG data available today is not yet sufficient to make investment decisions.
There are also signs that some investment firms may be overlooking key demographics. Millennials generated 35% of all sustainable investment enquiries, followed by Gen Zs (18-25 year olds) at 28%. But financial advisors are almost four times more likely to target the former, suggesting more engagement with Gen Z could drive additional growth in ESG investing. Environment Analyst spoke to Glenn Fannick, head of business and commercial policy at Dow Jones, about the firm’s new platform and the complex landscape for ESG ratings.
EA: What is your sense of the shortfalls in terms of ESG data in the wider market, and how can Dow Jones’ new offering help?
GF: We are relatively new as far as providing ESG data goes. There are several providers out there who are heavily dependent on reported corporate data and rely on the honesty of companies to report data consistently. There's no strong regulation – although that's starting to change – on what you report, when you report and how you report. So it's challenging for providers to gather all that data, normalise it and make it available. What we've added that's different is the company reported data and then we've augmented that with information that's in the media about those companies. We have real time daily updates to our dataset based on news reports and the company ESG scores get adjusted on a daily basis.
EA: So the score for each company takes into account the difference between media reports and what company publishes in, say, an ESG report?
GF: I wouldn't call it the difference, but it's another factor in the scoring algorithm. So the algorithm starts with the company reported data and then it's augmented by the news aspect. You can think of it as kind of a transparency score, in that it's both what the company is saying about itself, and then the news reporting provides a check and balance against that. So if you take the news score out, the company could be highly rated versus its peers. But then if what's actually being said in the press is different, then the scores might be lower to reflect that.
EA: Is the news factor in the algorithm specifically news around ESG, or does it also take into account non-ESG related financial performance?
GF: The approach we've taken overall is a focus on financial materiality, so we're not looking at this from an ethics or environmental aspect. We're looking at whether or not what companies are saying about themselves and what the media is saying about them are financially material. We have to look at all the news, but we're only extracting from it elements that are relevant along those ESG topic areas. We use the SASB structure, which has five dimensions and each of those dimensions has a sub number of categories of topics, so there are five or six within the area of the environment. If a news item is reflective of one of those five or six items, then that would affect the company’s score.
EA: There’s already a discrepancy across ESG ratings from different providers, and that’s something critics of ESG have focused on. Is there a risk that creating additional scoring systems introduces more complexity into an already crowded market?
GF: This is definitely another score, that’s undeniable, but I think it's a better score because of the reasons mentioned. But there are certainly many different ways of looking at ESG and for different purposes. What's important to our clients is financial materiality, so everything we do comes through the lens of financial journalism and our mantra is accuracy, completeness and fairness. That is the same in our news coverage as it is in our data coverage. So to the extent that it's more data, what we've heard from our clients – asset management companies, for example – is that they want as many inputs as they can get. Hedge funds are always looking for another set of data, a different perspective. So in that sense, I don't think it's a problem. It depends on the use case.
EA: Your survey identified a need to cater to Gen Z and their desire for sustainable investment, is there room for the Dow Jones platform to address their needs?
GF: The first product that we’ve brought to market is specifically designed for asset managers and hedge funds. We are working on repackaging the data for more of a wealth management use case, so while the data would be the same, the delivery mechanism would be different. Wealth management for individual investors is definitely another use case and this survey speaks to that. We are definitely seeing – not surprisingly – is that Gen Z is more interested in ESG than millennials, and millennials are more interested than baby boomers. We take a neutral perspective on that and provide what we feel to be accurate data to those who want it. I think that the survey shows that we're on the right track.
There are multiple things that you take into account when you as an individual invest. You may consider the primary objective is making as much money as possible, you may consider the primary objective is putting money in companies that you believe in. And the largest number of people probably fall in the middle. I suspect a significant number want to find companies that are investable that they think will make them money, but in a responsible way. Maybe they're willing to give up some return in order to find something that suits their ideology. So this data can show you what companies are doing and whether they're being successful.
EA: So as an example, you might have a mining company with a particular ESG score based on reported data. Dow Jones’ news driven data set would tell you about whether that company was being investigated or challenged on particular actions or policies. And that would allow investors to set that investigative information against company reports.
GF: Yes, that's true, and I think another main element here is that it allows comparisons across companies in an industry. For instance, a mining company likely has more physical environmental issues at play than a media company does. A media company, perhaps, has fewer environmental issues, but maybe more governance issues. Not every industry has the same number of the same elements that you want to judge on. If you're interested in investing in, for example, lithium mining, but want to try to find a company that is as responsible as possible in that space, then this could be a way to sort all the lithium mining companies and see who's who's being most or least responsible.
EA: Is this news-driven qualitative data reliant on just the quality of investigative journalism and the ability of news media to hold companies to account?
GF: There are thousands of sources that go into the news feed. Some of those sources are our own: The Wall Street Journal, Barron's, MarketWatch, etc. But they're also sources that come from Factiva's dataset. So it's a global setup. But to answer your question, I think that the more light is exposed and the more journalism there is, the better the scores get. We can’t evaluate something that no one's reporting on.
EA: Sustainability consulting firms often advise corporate clients on how to report ESG data. Is there advice that emerges out of Dow Jones’ monitoring of ESG media coverage?
GF: One piece of advice is they need to look at a company’s scores on all the major vendors. If you look across four or five different vendors you'll find that the scores are inconsistent. Each has their own mix of different weightings, there's not a unified score and that's one of the problems. So you want to be aware of what people are saying about you and be proactive in addressing that; for example, if a company contacts us and says ‘I think that score is too low because we've done an x and y’, that will go into a review queue, and we definitely will change things if inaccurate.
The other thing is that companies have called us and said ‘why are we not in your dataset?’. And that's because they haven't reached the threshold of reportable elements. Or maybe it's because they didn't put out information in a way that it was accessible. So another aspect is that when you report, you want to make sure you report it in a way that's as structured and clear as possible. The company that we work with who does the data extraction has a layer of AI, but if they're told that there's another report they missed, they'll factor that in or they will review that data. It's still imperfect science, it's definitely a messy world out there as far as reporting goes because there is no standardisation yet. I think until governments put standards in place, that will continue to be the case.