On ESG and materiality, NGOs - campaigning groups - make the weather. They set the business agenda for not only the environment and sustainability, but also human, labour and animal rights, and even corporate governance (think Oxfam and tax havens).
By engaging constantly with banks, insurers and other investors and putting intense pressure on leading firms to acknowledge the social and environmental consequences of funding decisions, NGOs have ensured that institutional investment policies have evolved in lock step with their concerns. In fact, without NGOs, today's mainstreaming of ESG would probably never have happened.
Because NGOs set the pace, investors are able to study their campaigning to anticipate shifts in ESG priorities. Whether it be screening out problem companies, identifying sustainability leaders, or forecasting factor trends, straight-talking NGOs are a more reliable guide than conventional due diligence sources such as media coverage, and more timely than indexes since NGO data is generated continuously as a result of campaigning, not only once or twice a year. And unlike indexes, NGO sentiment does not rely on corporate self-reporting and is unaffected by management wishful thinking.
NGOs can be particularly effective at exposing problematic firms. They are not afraid to call out corporate misbehaviour wherever they find it, while their extended networks of local allies mean intelligence on even obscure or unlisted companies will be exposed, which can be very revealing if they are suppliers to well-known firms.
Within days of the Rana Plaza factory collapse in Bangladesh in 2013 which killed over 1,000 mainly female garment workers, NGOs in Europe and North America knew through local partners which Western brands had been sourcing from firms operating in the building - identified from garment labels found in the rubble - and therefore could be made morally responsible for paying compensation to the victims' families.
Almost immediately, NGOs were publicising brands and their parent companies and demanding they help financially and practically. This developed into a campaign to get brands to underwrite higher workplace safety standards across Bangladesh's textile sector. At every step, NGOs ensured that the world knew which firms were cooperating and which were resisting, data that could be fed directly into institutional databases that rate their individual ESG performance. For high profile investors like banks, negative NGO perceptions of clients, "unfiltered through someone's rose-coloured glasses" as one user recently put it, can have a tangible effect on institutions' own reputations. Likewise, watching a direct rival praised for a policy commitment that they themselves have failed to deliver is an uncomfortable experience for senior management.
Identifying corporate sustainability leaders
ESG funds are still largely concerned with keeping out ‘bad' investments. However, a growing trend is to find firms that should be up-weighted for their superior ESG performance. According to research by investment manager and indexer Arabesque, a Sigwatch data user, firms which prioritise sustainability and ESG not only benefit from lower cost of capital, they outdo their peers in investment performance.
How though to identify those strong performers without relying on the firms' own claims? Here NGOs come into their own. As well as being independently minded, they increasingly use their campaigns to praise as well as criticise firms based on their behaviour and policies. Another data point is how companies interact with NGOs. One financial institution tracks NGO-corporate partnerships as a key indicator of the seriousness of corporate engagement. Another notes when NGOs praise corporations that set policy goals in line with their own objectives. In this way NGO data is able to distinguish genuine effort, which is likely to influence the culture and long-term behaviour of a business, from empty claims.
Forecasting factor trends
As initiators of issue trends, NGOs are often the first to identify emerging problems that can affect or disrupt whole industries and their long-term value. For example, the rise of ‘green vegetarianism' has implications for every part of the food industry and agribusiness. Also, anxiety over digital privacy is forcing firms like Facebook and Google to rethink their business models, while effective campaigns against chemicals in the environment have forced apparel brands to look for new ways to provide functional fabrics.
Being able to reliably predict external forces which could impact them directly or through their portfolios is really important to financial institutions. Traditionally mainstream media analysis is used for this purpose. However, users say this is less effective than might be assumed. For example, generalist media is too broad and unfiltered, while specialist publications are too narrow in perspective. By contrast, NGO campaigning can not only reveal which sectors are receiving negative attention, but it will also tell them why, down to the level of individual companies, regions or countries.
Robert Blood is Sigwatch founder and managing director