Parnassus Investments wants to add some clarity and transparency to the numerous ratings systems that have sprung up to measure companies’ compliance with ESG (environmental, social and governance) standards.
In pursuit of that goal, the investment manager, based in San Francisco with $45 billion in assets, launched a three-pronged rating system that compares its investments to the S&P 500 for performance in the ESG arena, Robert Klaber, portfolio manager and director of ESG research for Parnassus Investments, said in an interview.
The difference between the Parnassus rating system and others is that Parnassus’s system is transparent, its companies are evaluated quarterly, and it provides a quantitative measurement, said Klaber, who helped develop the system. In addition, those companies that are not meeting their own goals or are falling behind the performance of the companies in the index, are actively encouraged to improve.
If engagements are unsuccessful, we may file shareholder resolutions to encourage companies to improve their ESG policies, the firm’s website says. To help fulfill its mission, Parnassus is a member of Ceres, a nonprofit organization dedicated to building a just and sustainable future for people and the planet, and US SIF, the Forum for Sustainable and Responsible Investment.
The Parnassus metrics were launched earlier this year, so no companies have been removed for lack of compliance so far, but it is a possibility in the future.
“We want to use ESG as a lens through which to view a company’s performance and we use active management to encourage companies to improve if necessary,” he said. The application takes a hands-on approach, which involves Parnassus’s team members talking with management at the 140 companies in which it is invested on a regular basis. “We include ESG standards in our evaluations of companies because we view noncompliance as a risk to the company.”
The factors that are considered for companies vary from one company to another. For instance, a service-oriented company, such as an online automobile sales firm, would be judged heavily on customer service, while an industrial company would be judged more by the quality of materials.
“If a portfolio manager is only looking at a company’s spread sheet, he or she wouldn’t see any of those characteristics, where we do,” Klaber said. The metrics that have been developed and a comparison to the benchmarks can be found here.
“We want our companies to perform better than the benchmark, but we also want them to have science-based plans in place to improve performance in the future even more,” he added.
The data gathered in the research process will provide a baseline to judge companies’ improvements, Klaber said. For instance, the governance guidelines for the ESG criteria depend on whether companies have independent boards and have female and minority representation on the boards. A diversity among board members brings a diversity in thought to the boards, which benefits the company and the investors, Klaber said.