Only a few years ago, investors would still debate whether integrating ESG in their stock selection process made a difference. Some fundamental investors argued that they took ESG factors into account without calling it so.
Today, the discussion has shifted. Hardly any investor, questions the added value of ESG integration, at least not when entering the Nordic market. Questions remain, however, especially on the side of the end investor. How can we make sure that ESG integration has been conducted properly? How do we stay away from greenwashing?
Asset managers often describe the integration of ESG into their investment process as a journey, where the ultimate goal is to make a fully informed investment decision to reach an optimal risk-adjusted return. Data represent the first hurdle, as the availability and reliability of off-the-shelf measurements can be insufficient.
Another concern for fundamental investment firms, which have been performing well for many years without a formal ESG framework, is to integrate the new lens to enhance the current process without disrupting it. In some instances, it may involve training, in others, a gentle nudge from a specialised centralised ESG team, issuing internal warnings for companies that have scored poorly on a set of ESG metrics.
However, the analytical process works, engaging with companies is also an integral part of the ESG journey. Fundamental investors and analysts are used to interrogate companies on a range of issues. To add ESG on the agenda can seem tedious, but nowadays, companies have opened up to sharing data, and even learn from their investors’ requests.
In an industry usually rather secretive and protective of the carefully assembled information based on which investments are made, collaboration has become more commonplace, in regards to ESG.
Around lunch, on a bright February day in Stockholm, we discussed the opportunities and challenges of bottom-up ESG integration. We are now glad to be able to share the key insights of this conversation in the following pages, which we hope you will enjoy and, in turn, share with your peers.
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