Impact investors need better data

BY now, most investors recognise that it pays to take into account the environmental, social and governance factors that affect companies. From the accounting scandals at Enron and Parmalat, through the global banking crisis of 2007-09, the Macondo oil-well disaster, and recent vehicle emissions-testing controversies, "ESG" failures have had devastating financial consequences for businesses previously considered robust. It is intuitive that the more sustainably a company is run, the more likely it is to be earning revenues tomorrow.

This explains why ESG factors have become an important part of fundamental securities analysis over the past decade or so. But they have a critical weakness: they tend to describe companies' ways of organising themselves and operating, but say little about the products and services that are bought by consumers, taxed by governments, and outlawed and fined by regulators. A company like Total scores well in most ESG models, despite the greenhouse gas emissions from its core product, whereas Tesla, without a formal code of ethics or state-of-the-art governance, is rewarded for revolutionising clean transportation with a fairly poor ESG rating.

Lack of data on real-world impact