It is evident that ESG integration is a relatively new discipline within the asset management sector. Many investors, like (too) many listed companies, are still selecting a communication angle to disclose and analyse the sustainability performance of their portfolio by regarding ESG data as a late add-on to their basic analysis. But increasingly, empiric evidence is found that things are changing. And for frontrunner companies, this represents a significant opportunity to differentiate.
Through its culture of active ownership and fundamental analysis, Robeco Asset Management illustrates that a profit-oriented SRI strategy can outperform the market once ESG factors are linked to the value drivers. Over the past two years, the company has applied its “Value Driver Adjustment” approach in 127 investment cases leading to an average valuation change of 5% of the target price of the stocks analysed based upon key ESG factors. In 39% of cases, this approach led to a positive change in the stock’s target price and 13% to a negative change. Overall, 52% of the cases were impacted with the target prices changes ranging from -23% to +71%.
Example: Chr. Hansen (November 2014) – ESG highlights competitive advantage
Example: Anglo American (May 2014) – competitive disadvantage from ESG keeps us away
Table 1: Examples of Anglo American and Chr. Hansen – Source: Robeco
The Value Driver Adjustment approach consists of a straightforward three-step process as conducted by the sustainability analysts of Robeco.
Quantification of the (dis-)advantages is done in different areas: sales growth, margin impact, capital, and risk. After discussing the results of the analysis with the equity analyst, the summary of the impact of the analysis could look as follows. In this example from the Chemical sector, it resulted in a 15% positive target price change.
Table 2: Value Driver Adjustments for a chemicals company
With a only a small portion of SRI investors taking an integrated ESG approach and an average impact of 5% of the target price, it seems no more than commonsense that in comparison to topics such as profit protection programs, financial restructuring and strategy execution, few questions are asked on sustainability in the earning calls. However, this does not imply that companies should remain impassive in this area – on the contrary. As a recent Harvard Business School paper (Khan et al. ,2015) confirmed, it is not the overall sustainability profile of a company that’s crucial to investment performance and value drivers, but the most material factors.
The percentage of ESG integrated funds linking ESG to value drivers is on the rise as the market is smartening up. The examples of Anglo American and Chr. Hansen demonstrate that it could prove a very worthwhile exercise for sustainability frontrunners, as significant target price adjustments are a realistic possibility feasible.
As a result, the way to go for listed companies that want to differentiate themselves on ESG factors is to better facilitate the analysts. Hand them the right material. Design and deliver a value-driven analysis that emphasizes your ESG-performance in value beyond your (already impressive) sustainability metrics.
To get there, the suggested actions to take are:
Is your company looking to improve its ESG performance or looking for more street-cred from its ESG communications? Please contact Josée van der Hoek, Partner, at email@example.com or +31 6 28 02 18 80.
This article was based upon “Integrating ESG into valuation models and investment decisions: the Value Driver Adjustment Approach” by Dr. Willem Schramade, Sustainability & Valuation Specialist, Global Equities at Robeco Asset Management, which will be published in a forthcoming issue of the Journal of Sustainable Finance & Investment. For more case examples or details about the methodology used, please download the pdf-paper at the top of the article.
Image source: Mike Motzart, Flickr