Measured Progress

It's a potentially powerful approach--but one that also makes plain how difficult this sort of analysis remains. It's pretty straightforward, for example, to collect information on the breadth of health benefits a company offers its employees. It's another thing, though, to calculate the actual impact of those on employees' health--and how that reflects back on the company's future financial performance.

Even with a lot more resources dedicated to the task than a decade ago, measuring and quantifying so-called environmental, social, and corporate governance (ESG) factors is tricky. Sure, businesses have begun to disclose more information, driven in part by investors demanding more transparency. "There's a whole movement pushing companies to standardize reporting on ESG and to integrate it within their traditional reporting," says Jane Ambachtsheer, who heads Mercer Investment Consulting's responsible-investment practice. But while a handful of companies (like those we surveyed) are eager to share, most haven't even begun to think about such issues. Beyond that, many intangibles simply aren't very … tangible.

So how do you measure corporate conscience? The strategies have grown more sophisticated since people started thinking about socially responsible investing in the early 1970s. Back then, Pax World launched the first socially responsible mutual fund in the United States--and its approach centered on banning investments in so-called sin stocks, those companies involved in alcohol, gambling, tobacco, and weapons. Now Pax has begun incorporating data on climate change, sustainable development, and human-rights concerns--criteria it says "were not topical when the screens were first adopted."

Asset4's proprietary system tracks everything from patent filings to carbon-dioxide emissions reports. Scoring companies on each of those 250 criteria, it then produces an integrated overall rating, from A-plus to D-minus. It also lets users customize their ratings, keying in on specific ESG criteria. "We slice and dice the data and serve it up ready to be consumed," Ohnemus says. "Users can then do whatever they want with it."

Innovest, by contrast, starts by analyzing sector-specific risks and opportunities. Its analysts then gather data and interview corporate executives about company-specific environmental, social, and other issues. It weights the data differently, according to industry; carbon emissions, say, are likely more important for an oil-refining company than for a software outfit.

Both approaches rely mostly on corporate self-disclosures and what companies choose to reveal about their human impact mostly isn't subject to any broad standards. That's one hurdle to broader adoption of such strategies. Another may be that investors aren't quite sure yet what to do with the results. About 75% of institutional investors believe that ESG issues can affect investment results, according to a recent Mercer survey. Yet fewer than half of those institutions plan to assess whether such factors are considered as part of their investment process.

That finding signals the reality that still governs Wall Street: For most investors, it's still all about the numbers--and mostly, it's about the short term. Even contemplating the measurement of human impact implies an investment horizon far longer than the average I-bank analyst is trained to contemplate.

That will change. Ultimately, the evidence is just too powerful not to be embraced by mainstream investors. A recent study by Accenture determined that intangible assets account for about 70% of the value of the S&P 500, up from 20% in 1980. That's one reason the world's six largest accounting and auditing firms last November called for a drastic overhaul of corporate reporting to better account for the extra-financial drivers of corporate performance. In other words, incorporating ESG factors into business processes and evaluations is shifting from a moral imperative to a business one as well.

As that happens, the investing world could look more and more the way it does at London-based Generation Investment Management, founded in 2004 by David Blood, former head of Goldman Sachs Asset Management, and former vice president Al Gore. There, human and social impact is simply part of everyday investing. Every dollar under management is subject to strict guidelines on sustainability and long-term success.

It will be five years, perhaps longer, before that approach is broadly accepted in the United States. "Over time, more and more managers will see the value of long-term research," says the firm's U.S. president, Peter S. Knight. "To integrate the two disciplines, the long-term research plus fundamental equity analysis, is hard to do. But I think it will happen."

Yuval Rosenberg is a freelance writer in New York.