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SOCIAL WASHING: DO POLICIES GUARANTEE POSITIVE OUTCOMES?
ESG
By Mackenzie Hargrave | October 19, 2022
Accusations of “greenwashing” loom over the sustainable finance and responsible
investing space. It is an ugly shadow that suggests well-intentioned strategies
are in fact ineffective because the information used to build ESG portfolios is
fundamentally misleading.
Greenwashing is often raised in blanket claims that are hard to disprove, even
though doing so is crucial to reaffirm the efficacy of sustainable finance. To
do so, we need to be able to differentiate between real-world outcomes and
marketing material that obscures the full scope of corporate impacts.
It is no secret that public corporations’ obligation to deliver shareholder
value can conflict with safeguarding against negative outcomes for communities,
employees, and the environment. For this reason, we turn to information reported
by external stakeholders in local and national news, industry reports, and NGOs
to capture corporate behavior.
This article explores information about external stakeholders using the Adverse
Outcome Signal, which identifies companies with a high volume of very negative
information related to ESG topics to measure whether corporate social
responsibility policies are falling short.
Focusing on the topic of human rights and community relations, the analysis
finds that the presence of a human rights policy does not safeguard against
harmful impacts on the surrounding communities.
REGULATORY CONTEXT
The EU Action Plan on Sustainable Finance has introduced extensive disclosure
requirements for corporates and financial institutions. The disclosures require
them to report reliable and comparable sustainability information, which in turn
provides transparency to support informed decision-making and safeguard against
misleading marketing.
The Sustainable Finance Disclosure Regulation (SFDR) component, aimed at
financial firms, outlines metrics that financial market participants must report
for all investments, regardless of the product or fund mandate. These
disclosures termed “Principal Adverse Impacts,” range from greenhouse gas
emissions to the number of workplace accidents. Among these metrics are flags
noting whether investee companies have social, employee, or environmental
policies in place.
EXPLORING THE PREVALENCE OF HUMAN RIGHTS POLICIES
The analysis below explores policies and outcomes for a universe of
approximately 1,400 companies. This universe is defined by isolating companies
that are covered by the FactSet SFDR Principal Adverse Impacts (PAI) dataset and
have at least 25 ESG-related articles over a trailing 12-month period, as
captured by the FactSet Truvalue SASB (Sustainability Accounting Standards
Board) Scores dataset. The companies are heavily concentrated in the U.S., with
a small minority based in Europe or the Middle East.
As the pie charts display, most companies in this universe have policies on
human rights and OECD guidelines for Multinational Enterprises or UNGC
principles in place.
Source: FactSet
Intuitively, companies are not incentivized to disclose the presence of human
rights incidents publicly. This is reflected clearly in FactSet’s SFDR PAI data,
which captures company-reported information when disclosed and does not estimate
or assume the presence of human rights incidents in the absence of reporting.
Source: FactSet
Hopefully, the roll out of the CSRD (Corporate Sustainability Reporting
Directive) will improve the transparency of corporate disclosures for companies
subject to the mandate. In the meantime, and for companies not covered by CSRD,
Truvalue Scores and Spotlight Events offer a timely, objective alternative to
measuring corporate outcomes.
CREATING AN ADVERSE OUTCOMES SIGNAL
FactSet ESG experts explored the relationship between corporate policies and
real-world outcomes by comparing companies with and without human rights
policies. To measure outcomes, the team analyzed the FactSet Truvalue SASB
Scores and Spotlight Events data related to the SASB Human Rights & Community
Relations category (for brevity, we’ll refer to this as “Human Rights”).
Truvalue data quantifies external stakeholder sentiment on ESG issues by
measuring the volume and polarity of articles related to a given topic and
company daily. Those articles are sourced from local and national news, NGOs,
industry reports, and more.
In a nod to the ESG Activity Signal, the team assembled an Adverse Outcomes
Signal that combines ESG volume and sentiment. In short, the Adverse Outcomes
Signal ranks companies by those with the highest trailing 12-month article
volume related to Human Rights issues and the most negative information related
to Human Rights. Like the Activity Signal, the article volume is normalized by a
measure of expected attention. In this case, trailing 12-month dollar trading
volume is used as a proxy for expected attention. The ranked values of sentiment
and information flow are combined to form the Adverse Outcomes Signal, which is
used in the analysis. While the Adverse Outcomes Signal is calculated monthly,
the underlying data captures new ESG information daily — offering near real-time
insight that doesn’t rely on annual corporate reporting.
The Adverse Outcomes Signal surfaces companies with a high volume of information
relative to expectations, along with very negative ESG polarity. Those within
the first quintile (Q1) received the greatest amount of negative stakeholder
attention related to Human Rights.
DO POLICIES GUARD AGAINST ADVERSE OUTCOMES?
Once the human rights policy information is combined with the Adverse Outcomes
Signal, the data suggests that human rights policies do not guard against
negative human rights outcomes.
The chart below displays the percentage of companies in each Human Rights
Adverse Outcomes quintile with and without human rights policies. The companies
in Q1 have the highest volume of negative articles related to human rights
issues. Companies in quintiles 2 through 5 have either decreasing volume or
increasingly positive information related to human rights, so we can think of
those quintiles as having fewer negative outcomes.
It's interesting to see that companies within each quintile have similar rates
of human rights policies in place. This suggests that the presence of a human
rights policy is not enough to protect a company from negative human rights
outcomes.
Source: FactSet
The chart below shows the distribution of companies in the first quintile (most
negative) by sector. The heavy concentration of companies in the Industrials,
Utilities, and Consumer Services sectors is unique to the first quintile.
Source: FactSet
The table below shows the top three sectors by company count in the remaining
quintiles.
Quintile
Top Three Sectors by Company Count
Q2
Industrials, Utilities, Technology
Q3
Technology, Consumer Non-Cyclicals, Consumer Services
Q4
Technology, Consumer Non-Cyclicals, Finance
Q5
Finance, Technology, Consumer Non-Cyclicals
ADVERSE OUTCOME REVEALED IN FACTSET TRUVALUE SPOTLIGHTS
The FactSet ESG team took a closer look at companies in the first quintile to
understand the nature of the negative information picked up by the Adverse
Outcome Signal.
Adverse outcomes emerged in different ways depending on the company. In some
cases, prominent human rights events are identified by a cluster of articles
related to the same issue and published in a short time frame, termed a
Spotlight Event. In other cases, slow leaking negative information is spread
over a longer time period, so it does not culminate into an algorithmically
detected Spotlight Event. Instead, it is tracked by the longer-term volume and
sentiment indicators and can be viewed within the FactSet Truvalue Platform.
ADVERSE OUTCOMES SHOWED REPETITIVE PATTERNS OF BEHAVIOR: AIRBNB
The Human Rights Spotlights associated with Airbnb (ABNB-US) reveal a shared
theme; the company’s ongoing business operations in territories where systematic
human rights violations persist.
In December 2020, a Spotlight was created from articles raising concerns about
the company’s listings in the occupied territories of Palestine, stating that
the tourist industry is being supported at the expense of Palestinian rights and
livelihoods.
Similarly, in February 2022, the company faced similar criticism over its
rentals in Tibet and Xinjiang where China is accused of human rights abuses,
forced labor, and forced cultural assimilation. Even before this, a January 2022
Spotlight offered a leading indicator of the storms ahead for Airbnb. The
Spotlight detailed a U.S. Congress letter questioning the company’s commitment
to human rights and anti-discrimination in the country.
Source: FactSet Truvalue Platform
ADVERSE OUTCOMES REVEALED BY SLOW LEAKING NEWS: TETRA TECH
In some cases, slow leaking articles foreshadow subsequent negative events as
they garner stakeholder attention. Tetra Tech (TTEK-US) is a prime example of
this. Between March 2021 and April 2022, Tetra Tech had two Spotlight events
related to the lawsuits filed against the company over toxic waste in San
Francisco. The Spotlights reveal a settlement awarded to homeowners at the San
Francisco Shipyard, a housing development located on the site of the former
Hunters Point Navy Shipyard. The San Francisco Examiner reported that Hunters
Point was exposed to radiation when it was used as a radiological defense
laboratory and Tetra Tech did not properly rid the site of toxic materials when
it was hired to clean it.
Source: FactSet Truvalue Platform
However, earlier in the year, Truvalue captured an article in July detailing the
activists’ charges that the company was “digging up radioactive dirt in its
plans to build upscale housing on the site of the old Hunters Point Naval
Shipyard,” according to The Final Call (Charlene Muhammad 2020, par. 1). This
led to radiation poising that was attributed as the source of cancer diagnoses,
high asthma rates, lung problems, and bloody noses from residents and students
at nearby schools.
Tetra Tech has a human rights policy in place and is a member of the UN Global
Compact.
CONCLUSION
Even as corporate disclosure of ESG information is in the process of becoming
mandated or standardized, like the works of EU, ISSB, SEC, we may still see
instances where corporations omit wrongdoing or focus solely on the relationship
between ESG topics and financial performance. For this reason, external
stakeholder insights—such as those referenced above—are critical to holding
corporations accountable for their sustainability claims and introducing
transparency into corporate behavior.
Jacqulin Kuk, Senior Manager, ESG Client Solutions, also contributed to this
article.
This blog post is for informational purposes only. The information contained in
this blog post is not legal, tax, or investment advice. FactSet does not endorse
or recommend any investments and assumes no liability for any consequence
relating directly or indirectly to any action or inaction taken based on the
information contained in this article.
Post Comment
MACKENZIE HARGRAVE
SENIOR PRINCIPAL PRODUCT MANAGER, ESG SOLUTIONS
Ms. Mackenzie Hargrave is Senior Principal Product Manager for ESG Solutions at
FactSet. In this role, she assists in the execution of FactSet’s ESG strategy
through collaboration with FactSet’s product development, sales, marketing, and
strategy teams. She and her colleagues aim to power the next generation of ESG
strategies with innovative data and workflow solutions. Ms. Hargrave earned a
B.S. in Environmental Economics from Colgate University.
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The information contained in this article is not investment advice. FactSet does
not endorse or recommend any investments and assumes no liability for any
consequence relating directly or indirectly to any action or inaction taken
based on the information contained in this article.
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