Blue Chip Issue 84

BLUE
CHIP
BOUTIQUES
Not everything that counts can be counted
ESG integration is more of an art than science
everything that counts can be counted and
not everything that can be counted counts,” was
once said by William Bruce Cameron in reference
“Not
to measuring human behaviour. Given how much
of investing centres on human behaviour, this pearl of wisdom
seems to have good application to the field. While one should still
try to measure what can’t be counted, it is good to remember that
the factors with the largest impact might be those that are difficult
to distil down to a single number.
This is especially relevant when evaluating Environmental,
Social and Governance (ESG) data and incorporating it into an
investment process. As asset managers, we spend a great deal
of time determining the value of a
There are over 600 ESG
disclosure standards, which
makes comparability and even
accountability extremely difficult.
company and assessing the risk of
investing in that company. ESG is an
important part of this. However, not
all companies disclose decisionuseful
information despite a
notable increase in sustainability
reporting globally.
A KPMG survey1 found that in 2020, 80% of companies globally
report on sustainability. Blackrock noted2 in their 2020 survey of
clients that 53% of respondents cited poor-quality ESG data as
a barrier for them to adopt sustainable investing: a classic case
of just because something is counted, doesn’t mean it counts.
What’s more, Ernst and Young estimates3 that there are over
600 ESG disclosure standards, which makes comparability and
even accountability extremely difficult. Thankfully, there has at
least been increasing regulation on what needs to be disclosed.
This can be seen in the proposed JSE Disclosure Guidelines,
the Security and Exchange Commission’s Climate Disclosure
requirements and the International Sustainability Standards Board
coming out with global sustainability disclosure requirements.
This is incredibly useful and a great first step towards getting
companies to think more holistically about how they create value.
However, it still leaves us with unquantifiable risks. For instance, the
amount a company spends on their community does not necessarily
tell us about the impact of the spend on that community or whether
there are underlying issues brewing. What it does tell us is that a
company is keeping track of that metric. This is at least a good start,
but more in-depth measurement and reporting is required.
Some metrics that can be measured are dependent on human
behaviour. Take the carbon tax for example. As per Climate Action
Tracker4, a carbon tax of at least $135 per ton of CO2 equivalent by
2030 on the majority of GHG emissions is required to limit global
warming to 1.5 degrees. Given the increasingly divergent views on
balancing climate action with energy security, it’s unclear what level
carbon prices will get to. What we can say with certainty is that South
Africa’s carbon tax will need to increase
from current levels of around $9 per ton
of CO2 equivalent. This is still far below the
levels required to limit global warming
to 1.5 degrees. The point being that we
must ensure that what we can count, is
made to count!
The fact that what can’t be counted
counts means that integrating ESG into an investment process
can sometimes fall more into
the art than the science part of
investing. That doesn’t make it any
less important than the other, more
quantifiable parts.
1 KPMG, The Time Has Come: The KPMG Survey
of Sustainability Reporting 2020
2 BlackRock, Sustainability goes mainstream:
2020 Global Sustainable Investing Survey
3 Ernst & Young, What to watch as global ESG
reporting standards take shape
4 Climate Action Tracker, State of Climate Action
2021: Systems Transformations Required to
Limit Global Warming to 1.5°C
Vuyolwethu Nzube, ESG Analyst,
Truffle Asset Management
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44 www.bluechipdigital.co.za