Integrating ESG
More and more investors are looking for the best ways to link ESG issues with company valuation. They see the potential to assess the quality of company management, control risks and create value.
Carbon emissions trading, green legislation and the growing need to secure public support for major projects or sensitive operations have all driven interest in how environmental, social and governance (ESG) factors affect financial performance.
Investors are exploring many different angles, including:
- Identifying un-managed ESG risks
- Deciding which issues may provide insights into management quality more generally
- Looking for cases where ESG leadership may create benefits such as staff or client loyalty, or valuable relations with regulators or local communities
- Comparing responses to new issues like bribery and human rights with more established concerns like the environment or child labour in supply chains
- Focusing on ESG responses in different sectors or across regions of the world to understand differences and spot likely trends
- Practical implementation
ESG integration can be as simple as raising questions for analysts to consider, to formally including an ESG 'factor' in valuation models. ESG data may have both short and longer term uses. Some investors have undertaken back-testing models to look for value links. For others it is a question of where to place ESG factors within the wider investment process.
The best approach might involve simply extending an existing approach to corporate governance by looking at the governance of environmental and social impacts - or adding an issue like Countering Bribery to your governance concerns.
We expect approaches to become more diverse as many more managers enter this field. EIRIS remains focused on supporting the variety of different approaches which ESG integration encompasses. We are happy to work with you to explore how you might best use our research in your particular investment process.
