5 Questions with Aneesh Raghunandan: Measuring ESG Business Claims v. Actual Behavior

December 13, 2022
By Kenneth Thomas

“Corporate social responsibility” and the related term “environmental, social, and governance” (ESG) are two of the biggest buzzwords these days in the world of investing. Many stockholders want to know that the companies they invest in are not harming the environment, mistreating their workers, etc. In turn, a large number of corporations have adopted social responsibility pledges, or signed on to multi-firm statements like that of the Business Roundtable.

How do we know these aren’t just empty words? This is where Violation Tracker comes in. As discussed before, Violation Tracker lets us cut through the fog of corporate public relations. We can see a company’s actual track record on the environment, labor, consumers, cheating the government, and much more.

Aneesh Raghunandan is Assistant Professor of Accounting at the London School of Economics in London, UK. In his Ph.D. dissertation, published journal articles, and working papers, he has made ample use of Good Jobs First data, including both Violation Tracker and Subsidy Tracker. He is now the academic data advisor and a member of the advisory group of Violation Tracker UK, our first international venture. He answered my questions by email.

Q. What is corporate social responsibility? What are ESG funds?

A: Corporate social responsibility refers to the concept that businesses should treat fairly the stakeholders affected by their business operations. These stakeholders include employees, consumers, the local community, and the environment. The recent push to understand and regulate firms’ ESG performance comes from a desire to get firms to internalize their externalities, such as manufacturing firms not paying for the additional pollution they release.

An ESG fund is a mutual fund that promises purchasers it will take these factors into account when picking stocks for its portfolio. ESG funds claim that they pick stocks with better track records on stakeholder treatment.

Q. How did you get the idea to examine whether “socially responsible” firms and ESG funds live up to their names?

A: We got the idea to examine the credibility of socially responsible firms and funds for a simple reason: such claims, and the associated investment products, are exploding in popularity. For example, the number of ESG funds available to retail investors has more than doubled in the past few years. Yet, measuring ‘ESG’-friendliness is surprisingly difficult, which leads to an obvious risk: it can be tough for the average investor to verify firms’ claims, many of which are undermined by Violation Tracker. We thought a comprehensive assessment of these funds and firms, given their increasing prevalence and broad claims, was vital.

Q. How did you analyze social corporate responsibility, and what did you find?

A. We took one of the largest recent proclamations of social responsibility – the Business Roundtable’s 2019 Statement on the Purpose of a Corporation – and matched the signatory firms up to Violation Tracker and a bunch of other data. We then identified these firms’ closest industry peers that did not sign the Statement and compared their performance along a number of environmental and social dimensions. We found, consistently, that (i) firms signing the Statement performed worse than their peers with respect to stakeholder treatment, and (ii) these firms showed no evidence of improvement in the period after the Statement.

Q. How did you analyze ESG funds, and what did you find?

A. With respect to ESG funds, we assembled complete holdings data for all mutual funds. Next, we matched the holdings data up to Violation Tracker and other data sources, and then tested whether ESG funds’ average portfolio firms were more likely to exhibit signs of better stakeholder treatment relative to other funds issued by the same asset manager at the same time. The comparison group is important because it lets us test whether ESG funds place greater weight on social responsibility than non-ESG funds; this turns out to not be true. ESG funds do have higher management fees, however…

Q. How important was Violation Tracker in making this research possible? What characteristics of VT were most useful?

A: Violation Tracker was absolutely vital for all of this research! One of the biggest issues in ESG research, historically, has been a lack of quality data. Until recently, investors and academics over-relied on ESG scores supplied by commercial vendors. However, these ratings have a number of issues, one of which is that they don’t seem to verify firms’ claims. Violation Tracker is one of the only comprehensive sources of actual, hard data on what companies are really up to and how they’re treating their stakeholders. Thus, it’s an absolutely vital tool for verifying firms’ and investors’ claims of social responsibility.

See also:

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