GLOBAL – The UN-backed Principles for Responsible Investment (PRI) has released two new reports demonstrating how investors are integrating environmental, social and governance (ESG) information into their operations.
The 'Integrated Analysis' report shows how investors are addressing ESG factors in fundamental equity valuation, while the 'Aligning Expectations' report is a guidance for asset owners on incorporating ESG factors into manager selection, appointment and monitoring.
In the first report, analysts are adjusting earnings forecasts, growth estimates and discount rates to reflect ESG data.
Nearly 20 case studies from brokers and research providers, including Cheuvreux, Citi, Société Générale and UBS, show how understanding the impact of ESG factors on sales, costs and long-term return on capital can enhance investment decisions.
Neil Brown, chair of the PRI's ESG Integration Working Group and SRI fund manager at Alliance Trust, said: "Successful investment requires a thorough analysis of risk and reward, and ESG issues are critical to the assessment of both.
"This report shows unequivocally that integrated analysis can be done and is being done by some of the world's largest financial institutions."
Challenges remain, however.
Short-term valuation tools cannot always capture ESG issues that will impact companies over longer timeframes.
Acquiring consistent, comparable, audited information also remains a hurdle to integrated analysis.
The 'Aligning Expectations' report shows that asset owners such as the London Pensions Fund Authority (UK), Catholic Super (Australia) and CalSTRS (US) are becoming increasingly sophisticated in ensuring that their managers meet their ESG expectations, while investment managers such as RobecoSAM (Netherlands), PGGM (Netherlands) and Co-op Asset Management (UK) are rising to the challenge of integrating ESG factors into their investment decision-making.
The guide includes resources to enable asset owners to include ESG expectations in requests for proposals, questionnaires, monitoring and discussions with managers, as well as sample clauses for manager agreements.
James Gifford, executive director of the PRI Initiative, said: "Asset owners' beliefs and expectations about how ESG issues should be managed and disclosed to best contribute to portfolio returns vary across asset classes and over time.
"The incentives and behaviour of investment managers are often not fully in line with these.
"Ensuring these interests are better aligned is a fundamental requirement for the delivery of a sustainable financial system, and is central to the mission of the PRI."
Both reports can be found here.