How Accurate are Controversy Scores?
ESG Controversies and their Use
Controversy scores are a popular tool used by impact investors to evaluate whether a company is involved in activities that negatively affect the environment and society overall. They cover a wide range of issues- such as human rights violations, environmental disasters, even issues relating to accounting. The controversies score is incredibly useful to use as a filter to avoid investing in problematic companies, especially for companies that have recently been under fire for some damaging activity.
However, some have complained that controversy scores are only helpful when news of a company’s controversial activities has already hit the mainstream news media. As it stands now, controversy scores don’t fully reflect the harm a company’s activities have on the overall environment or society as a whole.
The current issues of controversy scores
Some argue that controversy scores are poor indicators for the controversies a company may engage with in the future, as they don’t adequately explain how deep or broad the issues are or whether their getting worse or being resolved. For example, thousands of people die from poor working conditions or from contracting diseases associated with their workplace, but because a company doesn’t have to report on these deaths and could even argue that it isn’t something they should concern themselves with since they could’ve died from underlying causes as well the true nature of their controversial activities cannot be brought into light. Company executive teams are also capable of hiding the negative impact of their activities, which makes it harder to evaluate them for controversial activity. Only the companies that were caught in the midst of a scandal are reflected in the controversy scores, which leaves out hundreds of companies that may participate in the same controversial activities but haven’t been as transparent about it.
The controversy score also doesn’t account for the progress a company may have made since it’s last scandal, another reason why controversy scores are generally a poor indicator for future behavior. A company that may not have a huge scandal yet doesn’t mean it could never occur.
This leads to controversy data being a little less than accurate, with large data providers of over 5,000+ companies only scoring a small margin of those companies as actually having ‘severe’ controversies and a large margin as ‘minor’ or insignificant controversies. It could be that most companies are generally good about maintaining sustainability and just don’t run into that many controversies, but it could also be due to the lack of information providers have about the operations of these companies.
Can they improve?
As with most aspects of ESG investing, controversy scores can improve with further transparency. When investors are more aware of the nature of the activities companies undertake in their operations, the better their decision making can be in finding more sustainable companies to invest in. In the meantime, many data providers are doing their best to find solutions to the issue involved with giving accurate controversy scores. Taking into account the people and places affected, or even whether a controversy is structural in nature or not are all ways to assess for controversial activities even if there isn’t that much information available to us.
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