We want to invest for a better future, making a difference for our clients, society and the wider world, while also delivering strong, risk-adjusted financial returns. But ESG analysis can be challenging for a number of reasons. While third parties offer us some useful insights, views, information and data might vary considerably from one provider to another.
We value the intelligence provided by these external assessments. In forming an opinion of a company’s ESG credentials, however, we believe that it is critical to add our own insights. By doing so, we can make more informed investment decisions.
That’s why we designed a proprietary ESG house score to supplement our existing analysis. The system draws on predominantly raw data from third-party providers while taking into account the factors that we feel are most relevant or important for sectors, regions and companies.
How does it work?
Our ESG house score is designed to shed light on a company’s management of ESG risks. It draws on more than 100 internal and external data points to arrive at a single number, or score.
Our ESG house score is designed to shed light on a company’s management of ESG risks
While other ESG assessments tend to score, in turn, environmental, social and governance factors, our score aims to look at two aspects – how a company is governed, and how it operates.
The governance score assesses a company’s corporate governance structure and the quality and behaviour of its leadership and management. We assess all companies on all components of the governance framework. We selected the relevant scoring components using ASI’s longstanding expertise in corporate governance.
The operational score assesses how well a company carries out effective environmental and social risk management, as well as how it deploys mitigation strategies. Our operational score only assesses a company on the risk areas relevant to its business activities and location. We identify and weigh these key areas based on our ESG sector specialist’s view of how material the risk is for their sector and geography.
These scores are combined into one headline number, ranging from 0 to 100. This allows our fund managers to easily identify ESG leaders and laggards, as well as to compare similar companies around the world.
What’s more, the analysis is designed to be broken down into themes. These include climate change, environment, labour management, human rights & stakeholders, corporate behaviour and corporate governance – so delivering more nuanced insights.
Why should investors care?
More detailed data. With more than 100 potential data points we have the ability to dissect ESG information in much greater detail. Going beyond the headline numbers we can focus on sector-specific risks, or slice and dice the data in many other ways.
Challenging convention. The ESG house score supplements existing analysis from third-party ESG data providers, as well as internal sources. It creates opportunities for debate and discussion, and to look at a company from a fresh perspective. Having access to an analytical tool that’s designed to evolve as new data sources and new developments emerge helps ensure the score remains relevant to emerging ESG trends.
Building more resilient portfolios. Our ESG house score supports more informed risk analysis by highlighting key risk areas at a company and portfolio level. Visual tools provide both a high-level picture of the fund’s ESG footprint and more detailed stock-level assessments. We can then further interrogate risk areas through research and engagement, enabling us to make more informed investment decisions for portfolios.
Developing bespoke client solutions. The ESG house score will be a key input for many of our sustainability products in the future. Using the score, fund managers are able to easily see ESG leaders and laggards, which aids in setting clear, relevant parameters for our sustainability products.
It can be difficult to isolate meaningful ESG information. Our ESG house score aims to cut through the ‘noise’ and identify the material issues – those that have a financial effect on our investments. It enables us to target key issues and companies for further research and engagement, and to efficiently assess the ESG risks and opportunities facing our portfolios.
As ESG disclosures improve and our insights grow stronger, it will become an increasingly powerful tool that will help deliver positive outcomes for clients, as we invest for a better future.