Portfolio managers and analysts are increasingly incorporating ESG factors into their investment analyses and processes. However, ESG integration remains in its relative infancy, with investors and analysts calling for more guidance on exactly “how” they can “do ESG” and integrate ESG data into their analysis.
After extensive analysis of the ESG integration techniques of direct investors across the globe, CFA Institute and PRI collated the many ESG integration techniques used by practitioners and developed the ESG Integration Framework (see below). This article is taken from the Guidance and case studies for ESG integration: equities and ...
This report focuses on the current state of ESG integration in the Americas, with reports for EMEA and APAC are scheduled to be released in March 2019.
The ESG in credit ratings initiative aims to enhance the transparent and systematic integration of ESG factors in credit risk analysis. The PRI is facilitating a dialogue between credit rating agencies (CRAs) and investors to cultivate a common language, discuss ESG risks to creditworthiness and bridge investor-CRA disconnects.
Principle 2 of the six Principles encourages investors to be active stewards of their investments and incorporate ESG factors into their ownership policies and practices across different asset classes.
In fixed income, a key application for ESG information is to inform analysis of issuer creditworthiness. ESG issues, such as corruption or climate change, are potential risks to macro factors that may affect an issuer’s ability to repay its debt.
Fixed income investors apply ESG filters or screens to their investment universe to control which issuers or securities are considered for investment. This is an effective way of ensuring their investments are aligned with their (client’s) ethical motivations and reduces reputational risks.
Debt and equity holders both stand to benefit financially from successful engagements, as ESG-related risks are mitigated and opportunities maximised.
Governance factors such as institutional strength and political risks will have an impact on a sovereign’s ability and willingness to repay its debt on time. A country’s exposure and resilience to systemic environmental risks such as water scarcity will affect economic outputs, borrowing and its ability to attract foreign investment ...
Analyses of governance factors such as remuneration and financial auditing are common among bond investors, but few systematically integrate a wide range of ESG factors into credit analysis.
Case study by Itaú Asset Management
In recent years, investors have become increasingly sensitive to the potential financial impacts of risk management failures, malpractice fines and banks’ ability to meet new regulatory standards.
The importance of ESG issues in assessing fixed income assets and the latest developments in ESG incorporation were hotly debated in San Francisco at our first full-day fixed income conference.