9. ESG Integration Approach Dr. Daniel Wild
Head of Sustainability Investing Research & Development, Member of the Executive Committee, RobecoSAM AG
Sustainability Integration Strategy With the growth of sustainable investing, a variety of approaches for using sustainability (ESG)1 data have emerged. The “ESG Integration” strategy in particular has had a lot of traction in recent years. Global Sustainable Investment Alliance2 states that ESG integration is the second largest sustainable investment strategy globally, with USD10.37 trillion in assets under management (AuM). According to Eurosif,3 integration is defined as “the explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions.” There are different levels on which sustainability information can be integrated into an investment process. This information can be used in the process of identifying an appropriate asset allocation, both on a regional or sector level (see chapter 9.2). More frequently it is used within traditional financial evaluation of issuers for selection of appropriate investments, both on an equity and fixed-income level. Sustainability integration can have a qualitative form when financial analysts cover ESG topics for the in-depth analysis of a company’s strengths and weaknesses and take these insights into account in their recommendations (see chapter 9.3). The integration can also have a more quantitative form, when the input factors in a financial model are adjusted based on sustainability information (see chapter 9.1). Although integration approaches have primarily been used in active asset management strategies thus far, the rise of more passive and smart beta strategies over the recent past has seen a corresponding increase in interest in index-based ESG integration approaches. Just as we observe a variety of investment approaches, we also see a variety of approaches to sustainability integration. This chapter focuses on how sustainability factors can be integrated into a financial model for stock analysis, in the sense of a “systematic inclusion of ESG research in ratings/valuations by analysts and fund managers,” as defined in the Eurosif RI Study 2014.4 This requires not only the consideration of sustainability issues in the investment process but also a demonstration of the impacts that these issues have on the assumptions and the valuation of companies. 54
