ESG integration: the upward trend

Increased demand for strategies that incorporate environmental, social and governance (ESG) factors into their investment process is being driven by more investors wanting to align their investments with their own values, along with the potential for better risk-adjusted performance.

Not very long ago, someone wanting to express their ethical views would have typically invested in a strategy that excluded companies involved in unacceptable practises. However, with the world becoming more climate aware and investors striving to connect the dots to a more sustainable future, investment thinking has now changed.

ESG integration is a way in which ESG information is incorporated into investment decisions and analysis to help enhance risk-adjusted returns. This is regardless of whether a strategy has a sustainable focus. More importantly, it allows investment managers to understand the complexities of global megatrends.

At UBS-AM, we view this as being about making research, data and insights available to our investment teams to enable them to identify potential enhancements when analyzing companies and better account for material sustainability risks that can negatively impact financial performance.
Non-financial factors are increasingly being applied as part of the analysis process to identify material risks and growth opportunities. One key component of ESG integration is reducing risk and/or generating returns.

Not only does it better align investment decisions with climate change considerations, it also helps investors deal with the broad nature of the climate transition more effectively.

The past few years has also seen the availability of ESG research improve thus providing investment managers with the additional information to support ESG integration practises.

The Governance & Accountability Institute (G&A) research team also determined that 86% of the companies in the S&P 500 Index published sustainability or corporate responsibility reports in the year 2018¹.

Furthermore, recent evidence has shown a significant alpha potential in companies that demonstrate improvements in their sustainability performance².

¹https://www.sustainability-reports.com/86-of-sp-500-index-companies-publish-sustainability-responsibility-reports-in-2018/
² Nagy Z, Guise G. (2018) 'How Markets Price ESG: Have changes in ESG scores affected stock prices? MSCI Research Insight
 

By integrating ESG considerations in all investment strategies we believe this is a way of evaluating intangible factors that matter to a company's performance alongside traditional fundamental financial analysis.

Today, UBS-AM has reached an important milestone with most of our equity investment teams integrating ESG considerations into their investment decision making process.

We believe integration is demonstrated by the depth of our engagement activities which bring together the efforts of the SI Research and Stewardship team with individual investment teams to influence change at investee companies, ranging from adoption of climate mitigation policies to changes in management.

These efforts have led to enhanced stock research practices and stimulated dialogues with a number of companies.

So as support for political action on climate change grows and investors increasingly become interested in aligning their investments with their values, it is clear that we are seeing a new way of investing that is gaining in popularity.