The numbers of groups of people that have a sustainability focus has grown tremendously over the years, and the topic is not going away anymore. That is pretty clear to me. All asset managers have built teams to conduct voting and engagement and feed ESG information into the investment teams. Brokerage houses have also started producing vast amounts of ESG research. This is really new to me – and clearly is a big step ahead!
What seems to remain the same is that this information – while widely distributed – is still mostly read by me (as an ESG specialist) and some of the other sustainability specialists. Topics are wide-ranging and plentiful. We read a lot about investment opportunities arising from the 2-degree scenario for climate change, corporate governance in Asia, and the top five sustainability trends for 2017. Yet it mainly remains isolated from ‘normal’ fundamental analysis.
Indeed, I could not help but notice that this top-down ESG research is still hardly being read by ’mainstream’ financial analysts. That is quite understandable considering the fact that their raison d’etre is to make a good return for their clients. If they do not, they lose clients and eventually their jobs. Furthermore, as most analysts focus on a specific sector or industry, ESG overview papers are too general for them. Thirdly, financial analysts can only spend their (research) time once, and their priority often goes into what is immediately financially relevant. ESG information gets lost in the vast excess of information that is being thrown at them.
Don’t get me wrong: it is extremely important that this ESG research is produced, and there cannot be enough champions on ESG within the financial industry. But for ESG research to really do its job, it should not be performed in isolation from ‘mainstream’ fundamental analysis.
At Robeco, ESG is integrated into the main investment processes of equity and fixed income. While the initial ESG analysis is done by a dedicated internal sustainability analyst, the financial analyst brings it all together to make one comprehensive decision. A brief round of inquiry at the Global Equity team shows that in order for the team to be able to do this properly, the single most important factor is having access to relevant research. And relevance means there needs to be a link to financial performance; it needs to be tailored to the investment process, and the markets need not be pricing in this information already. Such company-specific research is highly differentiated, and so it often brings unique information to the surface that gives us further conviction in our investment decision.
Being close to the sustainability research analysts makes it possible for the financial analysts at Robeco to receive research that is tailor-made to their investment needs. From the sell side (brokers), we are also seeing some more relevant research being produced, where KeplerCheuvreux is adding ESG research to company reports, and Morgan Stanley is producing sector reports ranking companies on material ESG topics. For European banks Morgan Stanley closely look at corporate governance (and executive compensation), human capital, business conduct and cyber security, while for European medical technology companies their focus is on corporate governance, data privacy and tracking, environmental standards and patient safety aspects.
True integration would mean more and more of this kind of information being published in the standard company reports, and these topics would make the earnings calls of companies. I am looking forward to seeing more of this, as I am convinced that this would give analysts more conviction on what is behind the numbers, and would help us make better-informed investment decisions. That would really be making progress.