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    The State of ESG Integration

    Stockholm (NordSIP) – Fresh off the press, a report co-authored by Mistra Center for Sustainable Markets (Misum) and Sweden’s Sustainable Investment Forum (Swesif) sheds well-needed light on the current state of integrating environmental, social and governance (ESG) issues into financial analysis. The study aims at capturing the perspectives of different actors in the field, from sell-side analysts to buy-side portfolio managers and those working with investor relations. It provides a valuable overview of Sweden’s sustainable investment landscape as well as some concrete recommendations for financial actors and policymakers.

    The two leading authors, Misum’s co-director Emma Sjöström and affiliated researcher Rachelle Belinga, were aided and advised by a group of seasoned practitioners, Swesif board members Julian Beer, Åsa Moberg and Anna Strömberg. The study draws on thirty interviews with Swedish financial actors: ten each from the sell-side, the buy-side and corporate investor relations, respectively.

    The report starts on a positive note, pointing out a significant increase in sell-side analysts’ focus on sustainability in the past couple of years. Analysing the drivers of this change, the authors list several significant developments, such as investors’ growing interest in ESG issues, the EU taxonomy on sustainability activities, and the increased attention paid to and understanding of the financial relevance of ESG.

    Many of the participants in the study highlight the need to balance short-term and long-term issues in order to integrate ESG issues better. “The quarterly earnings call is a typical setting where companies often struggle to frame ESG issues in a financial context,” summarise the authors. These findings extend the results of a 2019 study by Swesif, Stockholm School of Economics (SSE) and the Stockholm Environment Institute (SEI) on integrating long-term perspectives into financial analysis.

    Another major challenge for those trying to fully integrate sustainability into their investments is quantifying ESG aspects. “The EU taxonomy and the harmonisation of other reporting standards are perceived as important tools for further supporting these advances,” states the report. Meanwhile, the study reveals that practitioners often revert to qualitative assessments of ESG issues in financial analysis.

    An important finding in the report is that the notion of ‘ESG integration’ has different meanings for the various financial actors involved, ranging from applying ESG scores to conducting a materiality assessment to inform and modify financial valuations. It leads to a key recommendation: “these three actor groups must find ways to increase the quality and relevance of their communications with each other.”

    The report provides many takeaways even for policymakers. There is a need to harmonise ESG standards, given the problems that different reporting standards create for financial actors. “We recommend that policymakers support the pricing of negative externalities to ensure that critical ESG issues for society are material for financial analysis and ultimately for investment decisions,” add the authors.

    “Once again, they [Misum] have delivered a high-quality insight into the financial community’s journey to enable successful sustainability integration,” commented Susanne Bolin Gärtner, Chair of Swesif, and Julian Beer, Project Manager for Swesif’s contribution, in the preface to the report.

     

     

    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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