Five things to consider when incorporating ESG across specific asset classes


Ashley Hamilton Claxton

29 October 2018

Thinking about material environmental, social and governance (ESG) issues, and a wider focus on investing responsibly, is becoming an important part of the decision making processes for a range of investors. However, integrating this thinking can often be more complex than meets the eye. With that in mind, we’ve pulled together a few key questions to consider when thinking about how ESG issues might impact your portfolios.

 

1 IS DATA AVAILABLE?
For large, publicly listed companies, ESG data is usually both easily accessible and fairly complete, covering a range of key issues. Third-party analytics and scoring are also prevalent. However, both disclosures and analysis become patchier, and in some cases the data might not exist for some types of investments, particularly financial instruments, asset backed securities and private loans. For these, a bespoke approach is needed.
2 WHAT ANALYSIS IS RELEVANT?
Views on ESG factors might vary depending on the type of investment. Even within asset classes, some ESG risks are likely to be more material to certain investors. For example in fixed income, the materiality of ESG factors to the underlying investment will be highly dependent on factors like the duration, where you sit in the capital structure, the covenants in place to protect your investment, and the nature of the underlying assets you are lending to.  
 3 HOW FAR SHOULD YOU ‘LOOK THROUGH’?
Investors need to ask themselves at what level they apply their ESG analysis. There are no hard and fast rules over portfolio disclosure and investors might inadvertently end up exposed to risks which they are unaware of. For example, through indirect holdings in investment trusts or fund of funds. 
4 LOOKING FORWARDS, OR LOOKING BACKWARDS?
When businesses have suffered scandals, the legacy issues arising from these tend to dog them for a number of years. Traditional ESG ratings tend to be backward-looking and may penalise companies for poor behaviour long after they have rectified the problem. Savvy investors need to figure out when a company’s practices have turned the corner and invest accordingly. 
 5 ALTERNATIVE PROBLEMS
Typically, the closer an investor is to an underlying asset, the more control they are able to exert. In purchasing a synthetic alternative to a traditional asset, investors can be exposed without the access to mitigation strategies. Investors in synthetic equity products can miss out on voting rights or the ability to engage with management.
Like many areas, ESG considerations can be varied and complex. We believe that the five factors are a useful starting point for any investor.
For more detail on how RLAM incorporates ESG factors across asset classes view our latest Responsibility Matters e-zine.

1 IS DATA AVAILABLE?

For large, publicly listed companies, ESG data is usually both easily accessible and fairly complete, covering a range of key issues. Third-party analytics and scoring are also prevalent. However, both disclosures and analysis become patchier, and in some cases the data might not exist for some types of investments, particularly financial instruments, asset backed securities and private loans. For these, a bespoke approach is needed.

2 WHAT ANALYSIS IS RELEVANT?

Views on ESG factors might vary depending on the type of investment. Even within asset classes, some ESG risks are likely to be more material to certain investors. For example, in fixed income the materiality of ESG factors to the underlying investment will be highly dependent on factors like the duration, where you sit in the capital structure, the covenants in place to protect your investment, and the nature of the underlying assets you are lending to.   

3 HOW FAR SHOULD YOU ‘LOOK THROUGH’?

Investors need to ask themselves at what level they apply their ESG analysis. There are no hard and fast rules over portfolio disclosure and investors might inadvertently end up exposed to risks which they are unaware of. For example, through indirect holdings in investment trusts or fund of funds. 

4 LOOKING FORWARDS, OR LOOKING BACKWARDS?

When businesses have suffered scandals, the legacy issues arising from these tend to dog them for a number of years. Traditional ESG ratings tend to be backward-looking and may penalise companies for poor behaviour long after they have rectified the problem. Savvy investors need to figure out when a company’s practices have turned the corner and invest accordingly.  

5 ALTERNATIVE PROBLEMS

Typically, the closer an investor is to an underlying asset, the more control they are able to exert. In purchasing a synthetic alternative to a traditional asset, investors can be exposed without the access to mitigation strategies. Investors in synthetic equity products can miss out on voting rights or the ability to engage with management.

Like many areas, ESG considerations can be varied and complex. We believe that the five factors are a useful starting point for any investor.

For more detail on how RLAM incorporates ESG factors across asset classes view our latest Responsibility Matters e-zine.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.