J.P. Morgan was asked in 1912 by a Congressional Subcommittee (the Pujo Committee) what the most important factor in determining creditworthiness was? His answer became famous:
“The first thing [in credit] is character … before money or anything else. Money cannot buy it.… A man I do not trust could not get money from me on all the bonds in Christendom. I think that is the fundamental basis of business.“
Environmental, Social and Governance (ESG) analysis, all the rage in recent years is, in fact, nothing more than an attempt to systematize the character analysis Junius Pierpoint flagged as being important over 100-years ago.
Jeff Zeyun Chen (et al.) of the Texas Christian University has taken a closer look, in the China context, at two questions relating to this: a) does ESG analysis provided by for-profit analytics compilers actually work in terms of flagging forward risk (it does, a bit) and, b) if it does who does a better job, local or foreign providers?
It’s clear. In China the largest local provider of this analysis, Sino Securities, does a much better job than MSCI. Sino’s analysis work is especially good at highlighting the social and governance issues that bear on corruption, employment conditions and possible regulatory violation.
The reason for this also seems clear; because this analysis isn’t a hard-science those closest to the individuals being scrutinized have a much better sense of who the weavy-operators are versus the Dudley-Do-Rights. J.P. would approve I’m sure.
You can access the work on full via this link Global vs. Local ESG Ratings.
Happy Sunday.
[A personal digression. A big problem I have with ESG analysis is by telling companies how they’re to be judged it allows shabby operators to game the system. It therefore provides false and/or misleading comfort to investors. Especially if analysis is farmed out to for-profit providers who mostly do elaborate box checking exercises.
Have we forgotten how useless ratings agencies proved to be at flagging risk ahead of the GFC? Risk is not volatility, and good-character is not whether or not a company has an inclusive mission statement; and there’s only one way to reliably mitigate it. Lots, and lots, and then some more, of YOUR OWN homework. Radical thought, I know.]