Measure what matters

Is the inclusion of ESG data the route to smarter investments?

22 Dec 2017

Expanding the scope of intrinsic value to include ESG

A Value-added Valuation

Determining the intrinsic value of a stock is undoubtedly a difficult, elusive process. However, an accurate assessment of a stock’s value is vital to investing successfully in active equity.

At UBS, it is our belief, that the incorporation of sustainability factors in the evaluation process is not only an integral part of that process, but also improves the quality of the assessments.

The evaluation of a stock’s intrinsic value has traditionally focused on financial data, as qualitative factors have been traditionally more difficult to subject to “mathematical controls”. However, the future prospects of a company can be strongly influenced by “non-financial’ factors, such as the quality of management and the work force, innovation, and the use of capital.

However, the evaluation needs to be data driven and structured. In order to succeed, we believe that we need to carry out this intrinsic assessment of value ourselves, owning the entire information chain to ensure quality, accuracy and real-time course-correction.

Thus, we at UBS, decided to build our own scoring system, based on relevant sustainability data, that we could use to compare and rank companies within the same industry, inspired by the Key Performance Indicators of the Sustainability Accounting Standards Board (SASB). We believe this process allows us to reach an objective ESG score which is transparent and comparable, reflecting our proprietary assessment of a company’s sustainability profile.

This proprietary scoring system can deliver favourable results , and our analysis suggests ESG factors can help mitigate downside risk without compromising alpha. This makes the inclusion of ESG factors particularly helpful to portfolio managers making choices between similar valuation opportunities.

The benefit to our clients is clear. Our approach provides a sound, traditional estimation of intrinsic value, enhanced by the structured inclusion of ESG data.

The power of intrinsic value

Considerable excess returns are the art of taking advantage of the difference between intrinsic value and market price. This whitepaper goes beyond traditional financial analysis.

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