ESG Investing
Endowments & Trust Funds are not Alone in Setting High ESG Standards - Private Equity, Institutional Investors, and Securities Exchanges Themselves Increasingly Show Evidence that ESG Performance is not a Tradeoff but quite the Opposite
Environment, Social, and Governance (also referred to as Socially Responsible Investing, Impact Investing, etc.) is a framework through which investments can be assessed, rated, and compared. Organizations use a range of approaches based on their investor base or to appeal to different investor types. Some may use “hard filters” (i.e. no investments in specific sectors or industries) while others seek a more proactive approach and engage company management and operations.
Investment returns have been shown to be enhanced when teams focus on material sustainability factors vs. general initiatives without strong evidence of materiality. Investment teams can use ESG data, and corresponding metrics, to enhance their fundamental analysis of companies. It is not an alternative investment strategy but rather complementary to traditional analysis of financial statements.
For illustration purposes, here is the approach from Arabesque Partners:
“Arabesque’s Sustainability Process is a multi-step process, which identifies the eligible investment universe for Arabesque’s investment strategies. It includes the following steps:
· Forensic Accounting, which identifies companies with aggressive accounting and governance practices
· UN Global Compact compliance, which identifies companies that are in violation of any of the principles around human rights, labor rights, environment and anti-corruption set out by the United Nations
· Proprietary ESG Scores, which integrate material ESG factors based on Arabesque’s ESG Weighting Matrix”
Environmental, Social, & Governance Categories and their Relationship to CFP (Corporate Financial Performance)
(click on the image to access the report)
Source: Deutsche Asset & Wealth Management. "ESG & Corporate Financial Performance: Mapping the Global Landscape." December 2015.
“A recent study by Deutsche Asset Management and the University of Hamburg revealed an overall positive link between embedding environmental, social, and governance (ESG) criteria into the investment process and improved corporate financial performance (CFP). The study, ESG and Corporate Financial Performance: Mapping the Global Landscape, published in December 2015, combines the findings of about 2200 individual studies, making it the most extensive overview of academic research on this topic.
The research revealed that the large majority of studies report a positive relation between ESG and CFP, and the relation appears stable over time. Further, roughly 90% of the studies find a non-negative ESG–CFP relation. As the graph shows, there was no major difference between all three criteria (E, S and G) when looked at individually. However, organizations see the greatest improvement in financial performance when they focus on specific areas of E, S or G, rather than a non-focused mixed approach.”
- Global Reporting Initiative. "Making the Connection: The real effect of ESG on Corporate Financial Performance." February 2016.
Arabesque's Modular Investment Process
(click on the image to access the report from Arebesque's Partners)
Quoted text & image source: Arabesque Partners. "Outperforming through ESG Quant." February 2016.
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