As we think about the future of our business, we believe it is essential to have a proprietary approach to sustainable investing in order to remain competitive and deliver for our clients over the long-term. Existing tools in the marketplace used to assess a company’s sustainability on the environmental, social, and governance (ESG) pillars have many widely acknowledged data flaws, such as being largely backward looking and lacking consistency.

We sought to leverage our global research team using their sector expertise and company insights to take a more fundamental approach to evaluating companies from a sustainability perspective. In addition to further aligning portfolios with client values, we believe that more explicitly incorporating ESG considerations as part of our investment process can help to deliver enhanced risk-adjusted returns over the long-run for our clients.

Global working group develops 40-question checklist to evaluate and grade ESG factors

At the heart of our process is the partnership between our team of global research analysts and our portfolio managers. As we thought about how to best approach improving our ESG process we kept to that core, forming a global working group involving key stakeholders from each investment team and our regional heads of research. We also leveraged the expertise of our Sustainable Investing team, coming together to brainstorm and agree upon key issues. The product of this working group was a proprietary 40 question checklist completed for all companies under coverage.

This questionnaire encompasses issues across the E, S, and G pillars, including questions related to the impact of environmental regulation, quality of labor conditions, and board diversity. To give an example from the environmental pillar, we ask: “Is the business vulnerable to regulation aimed at limiting greenhouse gas emissions?” An important characteristic of our questionnaire is that it allows analysts to grade the severity of a company’s exposure or transgressions. On the other hand, it also allows analysts to flag companies that are positive ESG outliers and identify those that are currently less strong, but are making demonstrable efforts to improve in the changing environment. We use this questionnaire as the backbone of our own proprietary scoring system, which leverages the knowledge of our fundamental research team and our quantitative research capabilities.

ESG checklist ultimately enhances overall research process and informs competitive landscape

Outside of our original goal of creating a proprietary, best in class approach to sustainable investing, the work we’ve done as part of achieving that goal has influenced the way our analysts and PMs think about companies and their long-term competitive advantage and landscape. Analysts and PMs partnered to look at companies they’ve known for years through a different lens, picking up on different nuances and insights along the way.

A key lesson we learned through this process is the importance of giving the analysts the tools to differentiate the impacts of key E, S, and G issues on companies. Incorporating a level of gradation really helped the analysts and PMs to identify the outliers on both the positive and negative sides of ESG issues and ultimately companies’ long-term positioning in the competitive landscape. In addition to helping us meet our clients’ needs and comply with increasing regulation in Europe, this process has also helped us to continue to deliver on our ultimate goal of delivering the best performance possible for our clients.