When numbers aren’t enough

ESG investors must demand more than headlines from their asset managers 

Ever since the United Nations-supported Principles for Responsible Investment (UNPRI) introduced the term ESG integration back in 2006, the investment industry has sought to make it easier to identify which companies are addressing environmental, social and governance issues and which ones aren’t hitting the mark. That search has led to a proliferation of assessment tools that purport to add clarity for asset owners but instead have reduced the ESG engagement process to box-ticking. It’s an exercise that doesn’t generate any meaningful insights for investors looking to do the right thing.

Our latest paper, “Lost in Translation – In Search of Authenticity in ESG Integration” written for institutional investors, seeks to shift asset managers away from simplistic tools and box-ticking models and to get to the core of what ESG integration really means. Its authors, Ulrika Hasselgren, Bonnie Saynay, and Dr. Henning Stein, argue we need a new back-to-basics model for ESG integration – one that’s lead by asset managers and that seeks to engage and understand, not just generate numbers.

What should asset owners and managers be doing differently? These three things:

Go beyond numbers –The fact that an asset manager reports 350 engagements last year isn’t meaningful unless you understand the nature of the engagements and whether they affected a buy-sell decision. ESG scores and ratings must be reached in a more nuanced and balanced way that isn’t just about headline numbers. Managers should be analysing the sustainability of business models and management teams and using that information alongside robust financials and valuations.

Start with governance – At the heart of long-term sustainable investing is governance. Asset managers must develop a good understanding of corporate efforts to achieve long-term relevance. They should approach companies directly to understand their vision and ability to deal with sustainability-related risks and opportunities that are truly material to their prospects and performance.

Do it collaboratively – ESG integration must involve the establishment of standardized non-financial ESG ratios that are related to long-term systematic risk. By collaborating together, asset and academia can develop these metrics and ultimately cement sustainability factors next to financial factors as two significant measures.

To find out more, download and read the full whitepaper written for institutional investors.