They argued that only full ESG integration has the potential to deliver sustainable value creation for all investors. However, only 21% of the institutional investors surveyed used it as such, even though the benefits are increasingly well understood. Why is this the case and what is holding them back? Eccles and Kastrapeli pointed to a lack of standards for ESG integration and a lack of data. They see data as the key to resolving the barriers to ESG integration.
Generally speaking, there are still many misconceptions about ESG integration and its impact on market prices. Some may confuse ESG integration with traditional negatively screened ethical investment approaches that focus solely on exclusion. We argue that ESG integration is about common-sense investing and inclusion. It is a financial assessment and valuation tool that can improve hard-core investment analysis.
For NN Investment Partners, the incorporation of ESG factors is an integral aspect of our fiduciary role towards our clients and a key element of the way we invest. Our goal is to achieve better and more sustainable results by properly incorporating relevant ESG information at all levels of our investment process. The result is what we see as a more complete approach to investing, one that provides deeper insights whilst presenting an opportunity to improve the risk reward balance.
It starts with materiality. Materiality is at the core of our ESG integration framework. For us, materiality means three things: identifying material issues that matter to stakeholders and that have a financial impact on the assets we are invested in, assessing the performance on the basis of these issues, and integrating these assessments into our financial and portfolio analysis.
Topics that are of significant importance to us include climate resilience and companies’ preparedness for change to ensure long-term value creation; food, nutrition and well-being; and the role of technology. These three megatrends shape the world that we live in, that we invest in, and that we leave to future generations. We are firmly convinced that ESG incorporation leads to better returns. Academic research, including the NN IP-commissioned research by the European Centre for Corporate Engagement at Maastricht University, shows that material ESG factors – specifically, a focus on improving momentum and (expected) performance on material issues, rather than levels of ESG scores – contribute to financial performance(2).
Where would we be without ESG data? ESG data is continuously evolving in scope, breadth and quality while lacking strict standardization. Over the years data have moved in focus from transparency, policies and processes to measurement of actual behaviour and societal footprint. This means investors also need to create a usage methodology that fits their ultimate purpose. Our model is that of an integration of ESG analysis and financial analysis with a focus on the material factors. This gives us a more complete understanding of an issuer’s strategic risks and opportunities and thus strengthens our conviction. We regard ESG information asymmetry as an opportunity in terms of the data we track, as well as how we bring it into our investment decision-making process. In doing so, we actively use the wealth of alternative ESG data and modern data collection techniques to add to our investment conviction. That way, ESG integration is not a barrier, but an enabler on the road to a sustainable future and attractive investment returns!
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(1) Eccles, R.G. and M.D. Kastrapeli (2017). “The Investing Enlightenment – How Principle and Pragmatism Can Create Sustainable Value Through ESG”, State Street. (2) NN Investment Partners (2017). “The materiality of ESG factors for equity investment decisions: academic evidence”.