Sustainable investment integration cannot happen through policy; it cannot happen through reporting; it cannot happen directly though datasets or via ratings.
Integration can only happen when a specific sustainability factor is analysed in the context of an individual company’s business model and applied to the value drivers of that company causing an investor to change their forecasts of that companies’ revenues or costs (or assets or liabilities) and thereby adjusting their target valuation of the company’s stock.
(Sure, you can use datasets to mess around with companies’ cost of capital or project forward statistical analysis of the past performance of selected ‘factors’ or you can apply ratings to post-trade portfolio analytics wrapped in ill-defined notions of ‘risk’ or you can twist the definition of ‘integration’ to suggest that it incorporates ‘engagement’ activity. You can, of course, do all of these things … but if you do, you’re not really integrating sustainability information into investment decision-making and you will be found out.)
How can sustainability factors be properly integrated into investment decision-making?
There are three pre-requisites:
- Investment analysts that understand sustainability factors,
- Sustainability analysts that understand how to analyse financial data, model and forecast
- Space is made for these two to meet to discuss scenarios, explore sensitivities, challenge assumptions, adjust forecasts adjusted and generate sustainable alpha.
There is no mystery to sustainable investment integration; there are no magic techniques to learn or secret black-box formulas to master.
(I never understand people who complain about ESG analytics being ‘black box’. They really are not that difficult to work out)
All that is needed is for intelligent analysts to communicate effectively with each other on a common basis of understanding.
… in most asset management firms, the investment analysts and the SRI/ESG analysts behave like teenagers at a dance. The boys on one side of the room; the girls on another; both interested in what is happening on the other side but neither quite confident enough to cross the floor and start a conversation. (Or was this just my teenage years?!)
… the dancemasters at SITA Training have fixed the problem, we have developed two training courses:
- Sustainable investment integration – a 2 x 1/2 day course that equips ‘mainstream’ financial analysts with the motivations, technical skills and communications capabilities to apply sustainability factors to their valuation and investment process
- Financial analysis, modelling & valuation – a 7-session course that teaches ESG / Sustainable Investment professionals the fundamentals of investment analysis … and does using sustainability-related examples and with reference to the practical ‘day job’ priorities of sustainable investment analysts
Through these two short courses, we will teach ‘mainstream’ and SRI/ESG analysts everything that they need to know to engage confidently – as equal partners – in sustainable investment discussions.
After that, it’s down to individual asset management firms to play the music…