Rise to the Occasion: applying ESG data in investment processes

I have noticed that many investors struggle with ESG data and how to apply it in their investment processes. In fact, a growing group believes that ESG issues are not material and have no added value[1]. What’s going on?

ESG performance and its impact on market valuations has been the subject of a vast number of studies for the past decade. This prompted a 2015 review by Friede, Busch and Bassen, who aggregated more than 2,000 empirical studies. They concluded that 63% of the studies showed a positive correlation between ESG – and financial performance, and that governance issues seem to be driving ESG momentum[2].

Last October, the Boston Consulting Group determined that a positive relationship exists between ESG performance and profit margins. For example, margins in consumer goods, biotech, oil & gas, and retail banking were higher for the top ESG performers than for the median performers. ESG analysis is a relatively new field that takes place in a more dispersed information environment than financial analysis. Despite efforts such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), we lack universally accepted ESG reporting and accounting standards. It’s no wonder that investors who want to apply ESG data frequently point to the barriers that stand in the way of making fast progress.

We have also come to realise that ESG ratings and rankings are not perfect either and have in fact failed to capture certain high-profile cases like BP, Volkswagen and, more recently, the South African consumer discretionary company Steinhoff.

These shortcomings should not stand in the way of investor commitment. Rather than waiting for ESG data to become “perfect”, investors need to rise to the occasion and focus on the “right” factors. This means making an effort to link the available “raw” sustainability data to financial data to develop better insights.

We as NN Investment Partners are a committed investor. This means that we pro-actively raise relevant ESG topics in meetings with companies. We explain why the information is important in our analyses and how it links with the way the investee company creates value for its stakeholders. If we as investors fail to frame sustainability issues in real business issues, both from a risk and opportunity standpoint, we risk losing credibility and missing out on a great opportunity to achieve sustainable capitalism through the execution of our fiduciary duty. We need to address ESG factors not as extra-financial but as core-financial. In doing so, we not only contribute to the acceleration of acceptance of ESG data, but we also raise the bar for ourselves as investors. Just as UK hit wonder Climie Fisher sung in 1987, we need to rise to the occasion and be an inspiration!

Johan van der Lugt, Senior ESG Specialist NN Investment Partners


[1] CFA Institute (2017). “Environmental, Social and Governance (ESG) Survey
[2] Friede, G, T. Busch and A. Bassen (2015). ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’, Journal of Sustainable Finance & Investment, 5:4.

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