What do ESG investors do with information on your company?
The key and greatest challenge to successful integration is to make the ESG data relevant to the specific investment process.
Following on from our earlier article looking at the impact of ESG on investment decisions, Ian Woods, head of ESG investment research at AMP Capital, gives further insight into the investors’ perspective when it comes to key non-financial information, and how such data is used.
How has the importance of ESG data increased recently?
With more and more investors integrating ESG into investment decision-making, there is an increased focus on the quality and quantity of ESG data provided by companies. ESG data facilitates objective assessment of a company’s non-financial performance, especially if it is linked to measurable targets set by the company. Companies can demonstrate improvements in ESG performance by providing comparable data over time.
While ESG data itself is important for investment analysts, companies also need to discuss why they believe it is relevant to their business, and how the company uses the data it collects.
How do fund managers synthesize ESG data to inform investment decision-making?
Ultimately, the purpose of analysts in actively managed funds analyzing ESG data is to provide investment insight. As investment teams have different approaches, the way in which they synthesize the ESG data into their investment process may vary; the key and greatest challenge to successful integration is to make the ESG data relevant to the specific investment process – there is no one right way.
Are there any issues that are particularly pertinent now?
The main ESG issue of relevance varies across sectors and even across companies within a given sector, but there are several ESG issues investors are focusing on. Climate change is a big concern, especially with the finalizing of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure report, and calls by investors for companies to report on climate change risk using the principles outlined in the final guidelines. Tax transparency and diversity – specifically gender equality – are also hot topics.
How can companies and their IROs best communicate ESG issues to investors? Is there a preferred method or format?
There is no one right way for companies to communicate on ESG issues. The key things I look for include answers to questions such as: does the company link the ESG issue with company strategy or company risk? How systematically is the company managing and measuring the issue, and driving improvement? Does it report information that is aligned to financial exposure of investors, for example by reporting on assets or operations in which the company has an economic interest, not just those it may operate or control? Finally, does it understand the impact of ESG issues outside of its direct control, such as its supply chain or climate change transition?
How do ESG factors rank in importance compared with other company information?
Increasingly, investors recognize that while tangible assets represent most of a company’s value, ESG data and analysis can provide insight into how companies are managing, protecting and growing these important assets. Traditional financial company data is still critical and there will always be challenges in assessing intangible assets, but ESG data and analysis are critical parts of this assessment.