Getting to the point
Pictet has been developing tools to assess companies’ SRI credentials since 1997. The problem, it seems, is that much of the information provided by companies under examination is incomplete. “Very often a company will put together a sustainability report but it will only show what it wants to show,” says Christoph Butz, sustainability specialist within Pictet Quants team in Geneva.
In his report ‘Less can be more: a new approach to SRI research’, published in March, Butz criticises the ongoing inflation of the number of criteria and indicators. “SRI agencies make a living from creating sustainability criteria and it has become a race where companies offer ever more criteria to outdo their rivals.”
But does this help the investor? Butz thinks not. “Each new indicator that comes to the market reduces the weight of the others. So the value added of the additional information is sometimes nil.”
He adds: “Agencies must have the courage to take a few steps back and say: what is it we really want to know regarding environmental sustainability? The problem is that several research agencies know that the number of criteria is a problem but they are very attached to what they have produced.”
He explains that there are one or two key factors that can usually be nailed down quite easily. “There is no point adding another 150 points because the main point will only get lost in the process,” he says.
The car industry is one of the two case studies that Butz uses in his research. “To assess a car manufacturer’s sustainability the key statistic we need is the average fuel consumption of its fleet,” he explains. “The European Automobile Manufacturers’ Association has acknowledged this, but only FIAT and, partly, Peugeot disclose the information; perhaps this is not surprising as they produce relatively small fuel-efficient cars.”
The airline industry is another example in the report. There is a correlation between the spot price for jet fuel and an airline’s sustainability measured on a combination of fuel efficiency and average age of fleet. As with the car industry, airlines don’t disclose this key statistic.
Butz notes that while sustainability analysts have to deal with a lot of information “many times the most important information is concealed, so in the end it is often a questionable exercise”.
He explains that for all the pitfalls of data collection, environmental criteria are easier to ascertain because they are quantitative. “Social criteria are more difficult because they depend on the quality of the interaction,” he says.
In his view job creation is the key indicator of a company’s social performance. “A company that scores well because it sources its printing paper from minority-owned businesses might have just laid off thousands of people,” he notes. “Even in Switzerland which is relatively well off, 85% of the population are concerned about losing their job.”
Another way in which Pictet’s approach differs from much of the research carried out to date is that it does not point to any direct short-term link between sustainability and financial performance.
“Depending on the precise criterion used we could end up with very different performance results,” Butz explains. “If we only look for financial performance we might find that the chosen indicator has nothing to do with sustainability.”
He adds: “You cannot sell a promise of outperformance. We have to be honest and say that we have a long-term interest in a sustainable future and that trustees should employ their skills to keep the risk low.”
As many trustees are pushed - both in terms of time and their understanding of investing - simply to focus on the financial performance of the fund, education will be critical. Butz’s view is different. “I don’t like the word educate,” he says. “There needs to be transparency for the buyers of the funds – that what is on offer is really sustainable.”
Public relations and communication present further obstacles. “We are often reproached for having the aim, through reducing the number of criteria, of cutting research costs,” notes Butz. “But it sometimes involves more time to come up with one very meaningful criterion; it would be much cheaper to take the information that is there.”
Even when this argument is won, uptake of Pictet’s new approach will not be universal. “Some just want to continue with their own values because not all have the same values,” says Butz. “Some invest based on religious principles. But on a global macro level sustainable development is more about the responsible use of natural and social resources.”