Senior Research Analyst
SRI, ESG, CSR, UNPRI…the investment industry is notorious for prolific use of acronyms and the responsible investment industry is certainly no exception. Environmental, Social and Governance (ESG) analysis can lead to better investment outcomes.
ESG is not the same as ‘ethical investments’, ESG analysis can help make better informed investment decisions by understanding how companies are managing their intangible drivers, which account for the majority of a company’s value.
ESG analysis covers more than environmental performance, in-depth analysis of the ‘S’ and the ‘G’ can also help investors find mispriced securities.
Responsible investments and strong financial returns do not need to be mutually exclusive. We can demonstrate that ESG analysis can be applied to create a better pool of stocks to choose from both in the short and long term.
Engaging with companies on ESG issues can lead to better insights and better investment outcomes.
What actually drives a company’s value? Analysis shows that the majority of a company’s value is made up of so-called intangible drivers, which are not necessarily found in financial statements. Examples include a company’s culture, its occupational health and safety performance and its supply chain risk management.Our research shows that the percentage of intangible assets as a percentage of companies’ market capitalisation has increased over time.
Given that intangibles increasingly make up the majority of a typical company’s value, by understanding how companies are managing their intangible drivers, investors can make better informed investment decisions. In addition, by understanding what is underpinning a company’s earnings, investors can assess the earnings sustainability of a company. If the business model relies on under-priced pollution, under paid labour or weak regulation, the current earnings levels might not be sustainable.
Good ESG analysis tries to answer two questions: First, what is the earnings or share price impact? Second, is it already in the price?
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