A LinkedIn post from Alex Edmans caught out eye this week, highlighting a Waverton Investment Management case study on their engagement with Vulcan Materials.
They noticed that Vulcan's water intensity in 2021 was substantially higher than its peers and initially thought that there was a mistake in the units used (e.g. giga litres rather than mega litres). Digging deeper they discovered that in fact the water use had been estimated by a third party and there was very limited metering.
The engagement by Waverton resulted in Vulcan undertaking a number of projects to install meters at some sites to get a more accurate figure.
The story highlights a few issues.
As Alex comments in his post "doubt the data" - implicitly it highlights the shortcomings of how ESG data is often used, as a definitive measure. The 'truth'.
ESG data is a useful part of the decision-making process, but it is not THE process. The data is not a simple 'if X then Y' in isolation. We need to understand what it actually captures and make adjustments accordingly. For example, are the units used consistent? Are they actual measurements or estimates made by either the data provider or the company? Even with Vulcan's new projects the number will still have a degree of estimation.
In addition, Alex and his co-authors in a recent paper found that more than two-thirds of scope 1 carbon emissions are estimated and more than 90% of scope 3 are estimated by the data provider - understandable given the breadth of potential parties involved, but that needs to be understood in the final decision-making.
Are there just errors such as incorrect classification? Iancu Daramus, Head of Sustainability at Fulcrum Asset Management gave an example of an asset-light mining royalties company that had been classed as 'extractive' - their engagement with the data provider got that reclassified.
In the case study, Waverton describe the "benefits of tenacity" in their approach to engagement. We think it is a great illustration that there is no substitute for 'doing the work'.
The story also highlights a problem with divestment based on a purely quantitative measure. Waverton could have decided that given the much higher water intensity, they could divest their Vulcan position. Firstly, the decision could be based on inaccurate information! Secondly, engagement could bring about positive change - which ultimately is the aim.
We have written about engagement with oil and gas companies previously and the importance of thinking like a 'corporate raider'.
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