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Probus Sigma is an independent technical and environmental investment research and development facility, owned by its staff
Probus Sigma concerns itself with two main product areas:
1. Environmentally based standards that are constructed and intended for use as investment facilitators
2. Environmental, Social and Governance metrics (ESG)
Probus Sigma has developed, advised and managed independent environmental standards which…
Environmetrics is not as such a new science as it originated with the Ancient Egyptians whose word for sustainability was stability. And those ancient Egyptians were making quite an effective use of it in their studies of sustainable food production and conservation of natural resources which led to the creation of the earliest instruments of measurement and to the beginning of predictive mathematical formulas.
Every applied science requires data, and data in turn begins with accurate measurement. In the days of the pharaohs, environmental water measurements were made using ‘nilometers’, deep wells placed along the shores of the Nile and dug especially to record the height of the river’s water. It is thought that the measurements were translated into estimates of crop yields.
The legacy of the inherently subjective SRI methodologies is that the gathering of basic data for assessing a company's environmental, social and governance (ESG) rating has been inconsistent, unreliable and, more crucially, almost entirely based upon corporate self reporting. All of the existing ratings agencies - DJSI, CSI, FTSE4Good etc., are relying on information provided by the companies and corporations themselves, with little or no external verification of fact. The point is that ESG is still an emerging area, and has outpaced the existing sphere of legal knowledge. Amongst other things this has led to the wide perception of ESG ratings and their vital analysis of a company’s performance and risks, as little more than PR tools. The importance of ESG ratings and CSR compliance as an accurate quantitive based calculation of company value and defined ESG risks has become widely accepted. Ranging from the effect on corporate reputation and brand equity valuation to the financial impact of sustainable development as drivers of industrial change, sustainability and ESG compliance are accepted as factors that drive equity returns in their own right. What is needed is a single global credible standard, with robust legal definition and supported by a genuinely unbiased rating system that is not only based upon reliable proof of claim but also generally accepted and applicable to practitioners and participants in the SRI industry.
Probus and the Financial Academic community have long criticized the Global SRI Industry for the complete lack of standards and
verification of the claims the Industry makes in regard to sustainability. Of the 41 Global Accords, Principles and codes of Practice which includes GRI & PRI, all
rely upon self-reported non-verified information. There is no redress for omissions and false reporting above a mild slap on the wrist. UNEP is complicit in these pseudo
metrics based upon fake standards. The entire SRI Industry carries these fundamental flaws throughout hundreds of differing SRI based “sustainability” analytical methodologies,
to be found in all the so called Corporate Sustainability Ratings Agencies, where the “analytics” are based upon the historic “reading” of corporately issued
Annual Reports. Other methodologies include analysing media reports which are mostly produced by the corporates themselves and “engaging with corporates” all of these methodologies are entirely subjective, unverified sources, the results of which are
reflected in the failure of SRI based Investment to perform or define the real value drivers within ESG, (an entirely different set of quantitive metrics to SRI). While corporates and
Financial Institutions proudly boast their signature to GRI & PRI, the truth is a different matter.
Increasingly major European Fund Managers, Sovereign Funds and Hedge Funds are calling for a solution to the ever growing problems of the lack of credible common metrics associated with Socially Responsible Investment, (Please see: Independent Reviews & Reports) (SRI) and it’s sibling Corporate Social Responsibility (CSR). The lack of commonly agreed definitions and a global standard which would facilitate some kind of credibility for these currently pseudo metrics continues to restrain Environmental Investment and therefore is substantially affecting the fight against Climate Change.
SRI Rules, Norms & Standards
The economist Milton Friedman once said that the sole duty of corporations was to make profit and to abide by the rules. But what are
the rules when it comes to SRI?
According to Dexia Asset Management, Global Standards would benefit the further expansion of the Socially Responsible Investment (SRI) space. Cécile de Lasteyrie, head of SRI development at Dexia AM, said “Investors talk about SRI a lot, but it is complicated for them to do. They need to understand how and what to invest in, which is why transparency is key to the development of SRI, and to aid transparency and full disclosure in the space, it would help to have standards. Currently, only local standards exist– there are no global initiatives.” France and the Netherlands are keen implementers of SRI, according to de Lasteyrie. Demand for SRI is also growing in Germany and Italy, but she sees less interest in the space in Spain. Responsible Investment (RI) makes up roughly one-quarter of Dexia AM’s €79.3 Billion assets under management…
The application of ESG data into the investment process should be identifying value and financial risk considerations within the same
To achieve this, Investment Managers must face two challenges: firstly to identify the value drivers within ESG, secondly to identify opportunities to achieve this, managers must have reliable and up to date quantitive ESG information. There are now several global data sources for SRI available to investors, including Thomson Reuters, MSCI and Bloomberg in the US, that provide detailed and timely information on SRI characteristics. Since companies are not required to publish ESG data but instead operate on a voluntary disclosure basis, usually under one of the global 41 Voluntary Codes of Practice, collecting SRI data on a global basis requires a substantial staff to disseminate the information. However, it should be noted that, Bloomberg, Reuters and MSCI, are fed their data mainly by the SRI Ratings Agencies, who gain it from the various reports and analysis which are in turn taken from the voluntarily disclosed data. Therefore due to the nature of self-disclosure, very little of this data has been verified or could be verified.
To duplicate this level of research and collation, is not practical unless the Asset Manager is a significant sized entity, therefore the smaller and midsized Asset Manager are reliant upon the Larger RI Ratings Agencies, and here is the first problem.
For Active Managers with risk and return targets set against mainstream benchmarks, the most important components are scope of research and timeliness in a fast moving market. The scope and accuracy of research allows for a wider selection of stocks which gives…
Much of the focus of Socially Responsible Investment (SRI) methodologies is to try and demonstrate high environmental and social performance
amongst listed companies with the aim of imbuing a perception of good corporate citizenship and thereby attracting investment.Quantitively based, third party audited ESG
metrics are based upon accepted mainstream financial risk identification and they are specifically designed to integrate with financial risk calculus, thus producing individual
risk calculations for each aspect of ESG risk: Financial, Environmental, Social and Governance, (F-ESG)…
Probus Sigma and this website as much as other companies and their online presences that operate in the environmental sector have been guilty
of using the terms SRI and ESG in close proximity without due care and attention to ensure that the difference in their definitions is understood.
In this article where we refer to the difference between SRI and ESG metrics, the fact that the two concepts are distinctly different is assumed but not discussed separately at length. Now it’s time to do just that.