Perspectives from Bailard’s SRII Group: Pushing for Progress in Standardized ESG Reporting

Blaine Townsend, CIMC, CIMA, is a Senior Vice President and Director of Bailard’s Sustainable, Responsible and Impact Investing group.

June 30, 2019


This year, Bailard celebrates its 50th anniversary. It’s a compelling prompt to look back and see how far we’ve come. When the firm was founded, the accepted role of a company (and its sole focus) was to drive growth. But, we believe, this shorted-sighted emphasis of value over values failed to account for certain risks including legal, reputational and supply

chain among others. The last decade has been a reckoning, but it’s well past time we account for and measure business success by multiple factors: financial and performance as well as environmental, social and ethical.


Judging by financial and performance metrics, the post-World War II economy boomed. But the emphasis on growth created incentives for governance scandals, including those featuring Penn Central Railway, Equity Funding Corporation of America and Allied Crude Vegetable Oil Refining Corp. In the 1970s, the Securities and Exchange Commission prompted the New York Stock Exchange to require public companies to have an audit committee composed of all independent board directors. Board governance has since further improved with the introduction of audit committees, nomination committees, compensation committees and limiting manager-appointed board members. Progress.


On paper, the Civil Rights Act of 1964 outlawed discrimination based on race, color, religion, sex or national origin. But the power to enforce the act was limited. A year before Bailard’s founding, President Lyndon Johnson signed an executive order prohibiting sex discrimination by government contractors and requiring affirmative action plans for hiring women. Court cases later set precedent and solidified protection of women and minority

rights, particularly those in the office. Progress.


A 1969 blowout on a Union Oil rig in the Santa Barbara set off one of the worst environmental disasters in U.S. history. For two weeks, oil flooded the California coast, fouling beaches and killing thousands of birds and marine animals. Yet out of this catastrophe, an environmental movement was born. On April 20, 1970, activists marched down Wall Street to declare the first Earth Day, and the U.S. Department of Environmental Protection was founded in December of the same year. Progress.


The New Regulators


It took corporate fraud, years of discrimination and a devastating oil spill to catalyze corporate, social and environmental policy changes. And though there have always been outlier companies that welcome their responsibilities as great corporate citizens, it did take policy or legal precedent to shift the tide—to set and mandate the “new normal.” This

reliance on regulators is a luxury, we believe, investors can no longer afford. Today’s regulators can’t or won’t act to effect change. And even if they did, corporations yield more power in the Beltway than they once did. In many ways, we’ve reverted to our post-World War II business mentality. And in this pursuit of growth, investor sentiment yields power.

The greatest regulators now are investors. But to regulate effectively, these investors need accurate, standardized data about the things they value; data that, like financial reporting, is standardized, measured, reported and audited. Without that same standardized approach to environmental, social and governance (ESG) reporting, investors can’t accurately assess and compare the triple bottom lines of public institutions.


A Growing Investor Need


There’s been progress in non-financial reporting over the last half-century—but it was hard-fought and still isn’t as effective as investors need. Initiatives like the Dow Jones Sustainability Index or the Carbon Disclosure Project relied heavily on voluntary self-reporting by companies and the development of sustainability rating systems by various stakeholders and data providers. So data was measured and reported, but not necessarily

standardized from one firm to the next and not audited by an impartial third party. Corporate culture or social reporting is similarly flawed. Employee reporting tools like Glassdoor and FairyGodBoss allow for more transparency, and some semblance of checks and balances, but they still lack standardization in how to measure data and how to convert qualitative insight into quantitative reporting. There’s limited opportunity to audit these inputs, except through whistleblowers or investigative reporters and analysts, and these reports rarely tie social qualitative data to a company’s financial performance. There’s been some progress here. Bloomberg launched a gender-equality index in 2016. Though the data isn’t audited or otherwise verified by a third party, it standardizes specific metrics and provides guidance on how to measure them. Not all companies that submit data are included in the index, and those that do aren’t ranked.


These examples show there are frameworks in place, and many companies do volunteer impact metrics. Some even pay to audit that information. At this point, standardization is the most challenging issue: from firm to firm, and from one industry to the next. How might an investor compare environmental “returns” in a technology company vs. a transportation company? Founded in 2011, the Sustainability Accounting Standards Board (SASB) aspires to create a unified standard of what nonfinancial factors public companies should report and how they should report them. And they’ve acknowledged that comparing one industry to another is difficult. Last November, SASB launched a set of 77 codified standards, providing

a complete set of global, industry-specific standards that identify financially material sustainability metrics for a typical company in an industry. They also created a “materiality map” to help investors and companies identify which sustainability metrics have the greatest chance to affect financial performance. Crucial intelligence for investors.

It took corporate fraud, years of discrimination and a devastating oil spill to catalyze corporate, social and environmental policy changes.

This Is Not a Drill


ESG—what we call SRII, or sustainable, responsible and impact investing—is not just a dogooder trend. We believe these metrics are correlated to financial viability. And, in our SRII work, their accuracy is paramount to inform risk modeling and to accurately

price financial products. Until support comes from Congress and other regulatory bodies, the responsibility of due diligence falls to the investor. At Bailard, we take this responsibility seriously and vet potential investments thoroughly. In our SRII portfolios, we’ve created models that leverage self-reported and third-party data and account for shifts in industries in order to inform our investment strategies. But the accuracy of this system is only as strong as the data.