Keeping Up with the Rise of ESG Investing Strategies

Take the Investor Perspective when Reporting ESG Information
Keeping up with the Rise of ESG Investing
Publ. date 23 Nov 2018
As their customers are increasingly asking for greener portfolio options, investors are left struggling to integrate sustainability into their portfolio management strategies. The main challenge for investors is coming from ESG data itself, which has remained scattered, incomplete, incoherent, and unstructured.

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Additionally, there is currently no uniform framework that allows stockholders to assess sustainability performance in a structured and comparable way, an obstacle discussed extensively at the Triple Bottom Line Investing Conference held in Stockholm earlier this month. So, investors have to create custom solutions that fit their ambitions. To accommodate them, companies can adapt and present their ESG information in a way that best showcases their performance to investors. But that means they first have to understand what investors are looking for.

Unfocused approaches to ESG investing

Taking a step back, the big question the investment community faces today is how to use ESG information efficiently in order to assess the impact of their investment portfolio. Indeed, investors often focus on too many material issues, not always the most material ones, and have their frameworks linked to high level activities rather than impacts. As discussed during the 2018 Triple Bottom Line Investing Conference, the main impediment revolves around how to best integrate all the different types of ESG data into portfolio management. To date, the investor sphere uses data from existing non-financial rating agencies such as Sustainalytics, MSCI, Thomson Reuters or Bloomberg. However, some investors have decided to take the lead and have developed proprietary frameworks in order to analyze data aligned with their specific ambitions.

Building investment strategies beyond ESG data  

For instance, certain investors have developed frameworks that go beyond using ESG data by assessing their investment portfolio’s impact on the Sustainable Development Goals or on the 2-degree scenario proposed in the Paris Agreement. Two examples are asset management firm Robeco and bank ING.

Robeco uses a 3-step SDG framework to select companies in which to invest. To determine a company’s SDG score, Robeco first analyzes what type of products and services are produced. Then, it looks at how the given company produces its products and services. As the last step, Robeco considers controversies that could have a potential impact on the company’s reputation. Based on the outcomes, it comprises its investment universe around the companies which scored a positive score in this assessment. As of today, Robeco has analyzed over 600 companies using its 3-step framework.

ING takes another approach by looking at company impact on the 2-degree scenario, global temperature rise will be below 2 degree Celsius as proposed in the Paris Agreement. By using an open source science-based approach to measure CO2 emissions in certain sectors, ING can identify where most of the greenhouse gas emissions come from. Terra’s approach takes a technology perspective in which it identifies what shifts in technology are necessary to achieve the 2-degree scenario. This input is used by ING to decide on what companies, from a technology point of view, to invest in.

To help resolve challenges linked to evaluating ESG impact, companies and investors need to work together. First, companies and investors are recommended to discuss and agree on what ESG information is necessary to understand and evaluate a company’s impact. Additionally, from their side, companies should continue to increase transparency on ESG topics and streamline their ESG reporting efforts in order to better serve the investor community. Finch & Beak has developed an approach that enables companies to better prepare for ESG reporting. Information on the ESG Streamliner can be found as a download in this article.

Seizing the opportunity of ESG investing?

For over 15 years, Finch & Beak has assisted companies in accelerating sustainability by using the results from ESG benchmarks and ratings. Currently, Finch & Beak is partnering with PRé Sustainability, an LCA specialist, to explore how to help investors better understand company ESG data so that it can be integrated into investment strategies. If you are interested in learning more about how to seize the opportunity of ESG investing, please contact Bas Nuijten, Senior Consultant, at bas@finchandbeak.com or call +31 6 28 02 18 80.

About Bas Nuijten

Sustainability professional with the aim to help organizations to continuously improve their sustainability strategies. | 
bas@finchandbeak.com

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