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Portfolio managers are failing dismally to make headway on ESG issues in their investment strategies.
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Peter Schellinck www.schellter.eu
ESG
Environmental
Social and
Governance
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Environmental, Social and Governance (ESG) Criteria
Over the past five years, the financial industry has adopted the acronym ESG (Environmental, Social and Governance) as the standard terminology for the group of extra-financial data that investors increasing evaluate as part of their comprehensive investment review.
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CSR / ESG / SRI
Corporate Social Responsibility (CSR) Explains how the company behaves
Environmental, Social and Governance (ESG) criteria
Codify what the company discloses / reports
Socially Responsible Investing (SRI) How investors analyze companies according to their CSR practices and ESG disclosures
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How should this information be organized?
1. Financial
Annual Report Audit Bond Issues Cash Flow Crop Insurance Dividend Fair Trade Financial Statement Market Share Share Price Transportation
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How should this information be organized?
2. Environmental
Climate change Deforestation Environmental Report Fruit vs. Juice Location of raw materials Groves Organic Certification Pesticides Sustainability Water Use
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How should this information be organized?
3. Social
Health & Safety Human Rights Labor Standards
4. Governance
Annual General Meeting Board Members Management Management Discussion and Analysis Supply Chain Management
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How should this information be organized?
FinancialEnvironmental Social Governance
Extra - Financial
Annual ReportAuditBond IssuesCash FlowCrop InsuranceDividendFair TradeFinancial StatementMarket ShareShare PriceTransportation
Climate changeDeforestationEnvironmentalReportFruit vs. JuiceLocation Raw MaterialsGrovesOrganic CertificationPesticidesSustainabilityWater Use
Health & SafetyHuman RightsLabor Standards
Annual GeneralMeetingBoard MembersManagementManagementDiscussion andAnalysisSupply ChainManagement
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Structure of Underlying Model
3 Areas of Performance
11 Categories of Measurement
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The need: objective, transparent and comparable data
Standardised units across companies- Consistent approach to the data
Timely, on-going updates - Relevant, current information must be reported
Information broken into smaller units to measure performance
- Policies and outcomes
Common starting point for customised uses of the data
Have access to all sides of the data
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Relevancy of data
Relevance differs greatly across sectors
ESG reports are for various stakeholders
Marketing for customers, employees, general public Responding to problems and pressure A reflection of leadership and management quality
Necessity to cut through noise and stories
Policies must be broken down, and the extent of implementation must be measured
Objective variables must be carefully considered Contradicting controversies must be incorporated Biases of the data must be considered: market cap
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Trends in ESG risk assessments
Research providers and rating agencies Sector reviews Corporate compliance assessments Risk monitoring getting started
Brokerage research Picking themes to uncover value & risk for long-term
performance
Convergence between ESG analysis and financial analysis
Getting underway where ESG factors have an impact on valuation
Progress in information and tools available
ESG – proxy for quality management Avoid systematic risk Identify opportunity
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Investment priorities matrix” ®
Businesses with a single bottom line (financial)
Businesses with a single bottom line that
practice corporate social
responsibility
For-profit social enterprises(pure plays
and migrators)
Nonprofit social enterprises
(chameleons)
Traditional investors
seeking financial returns
FIRST PRIORITY
SECOND PRIORITY
THIRD PRIORITY
NOT A PRIORITY
Socially responsible
investors seeking both social
and financial returns
NOT A PRIORITY
FIRST PRIORITY
SECOND PRIORITY
THIRD PRIORITY
Social investors seeking both social and financial
returns
NOT A PRIORITY
THIRD PRIORITY
FIRST PRIORITY
SECOND PRIORITY
Social investors primarily seeking social
impact
NOT A PRIORITY
THIRD PRIORITY
SECOND PRIORITY
FIRST PRIORITY
