The value of ESG analysis

Thursday 7 November 2019

Abstract image looking out window

With a lot of discussion around ESG focused around its role and the standards and data available, you could be excused for thinking that its value was unclear. Lisa Beauvilain, Managing Director, Head of Sustainability & ESG, Impax Asset Management, thinks what ESG offers is quite clear and shares her experience of the value that it adds to analytical thinking.

 

Why ESG is important

We fully integrated ESG into the Impax investment process many years ago. Viewed alongside other processes, analysis of the accounts for instance, it offers real value to your understanding of a company. If you accept that at least 85% of the value of S&P 500 companies is intangible, it is evident that to unlock the value of a company you need to go beyond the balance sheet and ESG is one of the tools that helps us to do so.

 

ESG must be fully embedded

Think about ESG factors and engagement as embedded and complementary risk mitigation tools. The goal is to have the clearest possible picture of the company, including the direction of travel. If ESG is not fully integrated, if it is operated as a silo, the value that it brings is lost. For example, thinking through a firm’s emissions, and additional physical climate risk, exposure with embedded ESG allows us to identify how higher carbon costs and climate-related weather events may affect the future financial performance of a business.

Over the years that we have been analysing ESG factors we have observed that they can act as something of a ‘canary in the coalmine’, providing evidence of trouble down the line. For instance, the way in which ESG analysis highlighted governance concerns for a number of technology firms some time ago that are now facing greater public and regulatory scrutiny that has impacted their financial performance.

 

Data issues?

When I attend conferences there is a lot of conversation focused around data. What are the best sources of data? Is the data strong enough yet to provide meaningful analysis? I think this misses the point - you bridge data issues through engagement.

ESG disclosures from companies are still in their infancy. Unlike accounts, these numbers are as yet unregulated, so if you only focus on what is being disclosed you are missing the fuller picture.

In our view, engagement with companies is a key part of ESG analysis. There will be information that companies haven’t disclosed and you need to be able to access that information. You also need to make it clear that this information is important. This is challenging but rewarding and where the value add can really be seen.

The focus on data misses the point that it is your knowledge and understanding and what you do with the data that counts. That isn’t to say that data isn’t important, we use a number of sources which in addition to our engagement and proprietary data offers a useful contribution to our view of a company and sector. But just like other fund data, what sets apart a great analyst is the way that they interpret the information to hand.

 

Interested in learning more about the CFA UK Certificate in ESG Investing? Find out more here.

This article was written by Lisa Beauvilain, Managing Director, Head of Sustainability & ESG, Impax Asset Management. If you too would like to join the conversation and share your views on the development of ESG investing and its impact on our industry, please contact marketing@cfauk.org to enquire about editorial opportunities.

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