Investors in public and private companies — and the managers of hedge funds and private equity firms that oversee those investment accounts — are increasingly demanding companies report ESG measures.
"It's become more of an expectation from investors," said Twin Cities entrepreneur Luke Wilcox.
Wilcox formed Ethos ESG in 2019 to provide investors like himself with information on environment, social and governance (ESG) to help gauge how well their portfolios could affect social issues that matter to them.
Initially, Wilcox sold his reports to financial advisers and wealth management firms to better strategize investments in public companies for their clients. Now, hedge funds, endowments and private equity firms want his company's data to get a better understanding of their investments.
Wilcox sold his company last year to ACA Group, a New York-based financial services firm, to bolster its presence in the growing market for data about ESG actions being taken by public and private companies. Wilcox and most of the Ethos team remain in Minneapolis.
Ethos — which has 170 clients in the U.S., United Kingdom and Australia — splits ratings into two categories: risk and impact. Under risk, Ethos assesses a company's exposure to and management of certain risks such as climate transition, customer privacy, product quality and business ethics. Impact assesses a company's progress in areas such as climate action, gender equality, racial justice, health and well-being, Wilcox said.
The company also provides investors with a controversy score. Ethos monitors public news sources and government agencies for lawsuits, fines and other negative stories about companies, and assigns a severity score to each public controversy associated with companies, Wilcox said.
Demand for companies like Ethos is booming. In 2020, ESG-focused investments grew to $35 trillion, and is projected to increase to $50 trillion by 2025, according to Harvard Law School.
IBM announced in April it was collaborating with the New York Stock Exchange to help NYSE-listed companies with their ESG efforts. The tech corporation is selling at a discounted price a tool to automate the collection, analysis and reporting of ESG data.
In Europe and U.S., officials have implemented and voted to amend regulatory disclosure instructions so companies stay in compliance. The Securities and Exchange Commission has changed the way it requires companies to define human capital resources. It is considering requiring emissions data be disclosed.
While companies report sustainability differently, it continues to be a growing priority.
In a 2022 IBM survey, 80% of 3,000 chief executives operating in 28 industries around the globe said they believe improved sustainability investments would drive better profits within a five-year period. Demand driving transparency around sustainability mostly stems from board members, followed by investors, the report said.
Companies with little green footprint, like technology and service companies, tend to yield positive ESG results, Wilcox said. With material makers, energy corporations, and mining and chemical businesses, investors seek in-depth disclosures to measure how the company is mitigating climate risks.
If a company has an opportunity to transition into clean energy, an investor may be inclined to financially support its goal to be clean-energy, Wilcox said.
"Because the climate crisis is not going away," he said.
