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4 Strategies for Conducting ESG Analysis for Investment Funds

1 October, 2021
4 Strategies for Conducting ESG Analysis for Investment Funds

ESG investment is growing—or maybe exploding is more accurate. A recent Bloomberg analysis projects that worldwide ESG investing could hit £39 trillion by 2025. That’s a third of all global assets under management.

There is good reason for the rush to ESG, investors and companies are seeing powerful results. In reviewing close to 2200 empirical studies by scholars and investors, three researchers found that the large majority reported positive links between ESG and stable corporate financial performance.

And yet, there remains numerous challenges when analysing ESG performance for investment funds. The two most important?

  1. The complexity of ethical portfolio investing. Those who manage portfolios with numerous companies need a way to determine the ESG impact of each. It’s one sure way to glean an overall view of how investments succeed with sustainability.
  2. Companies differ, often sharply. That means data points, ratings and reports often lack common metrics you can easily assess for quality and accuracy.

Across the investment world, different approaches have emerged to respond to these challenges. You may assess investment funds by a ratings/score method, for example. Perhaps you’ve developed an in-house method to do this. And in backing those scores up, you could set out to conduct your own research.  

Of course, there are many ways to go about it, with some approaches more reliable than others. Then there is the factor of staying consistent over time. Even if you have a solid method for measuring performance, how (and how often) do you keep up with it?

This is where a smart strategy for evaluating ESG performance comes in. 


Strategies to assess ESG performance

We all know ESG performance is important. A growing awareness of this has taken shape in the investment world over the last two decades. Yet ESG ratings aren’t synonymous with ESG performance. Ratings guides like this one from Rio will help you understand the connection—or in many cases, the lack of one.

So - if ratings aren’t the final word on performance, we have a tough question on our hands. How can we assess our investments to measure materiality, risks, and performance? Let’s look at four ways to approach this:


1) Use ESG ratings

Ratings provide a starting point to get an initial idea of company performance. But these numbers must be taken with a grain of salt. As we’ve alluded to above, ratings come from a wide variety of methodologies and data sources. The result? In many cases, one rating differs wildly different from another. What’s more, a single numerical rating means distilling many different factors into the score, and that’s an unwieldy prospect to consider.

Ratings often inform underlying data more than the larger scores themselves. To that end, MSCI and Sustainalytics are often cited as sources. Still, there’s no single go-to rating for investors to reference.

Accordingly, it’s wise to look at multiple ratings, in part as a check and balance to offer different views of the same ESG category. In fact, investors often combine ESG ratings to create this more holistic view of a company’s performance: 

  • The SustainAbility global survey of 500 investors from 17 firms reports that 95% use ESG ratings, with 65% on a weekly basis.
  • They often use more than one rating source.

2) Conduct your own research

When performing your own research, you can ensure you are getting the information you want. However, it is also true that doing everything in-house can be cumbersome. Think about how hard it can be to manage all incoming data. This is where help from Rio’s software can make a crucial difference. Using an established ESG framework can also help you more easily compare the data sets of multiple companies.


3) Undertake direct engagement

What better way to get information than to source it directly from each company? When you ask directly, it means you get the numbers and data sets you need. You can also establish benchmarks by asking consistent questions within industries, allowing for direct comparisons, and adjusting questions as needed across industries.


4) Combine methods

This allows for gathering the most information and data possible. When you avoid leaning too hard into one area, you can create a more balanced, holistic view of each company’s ESG performance. You’ll also spot outliers more easily and can make informed judgement calls about the veracity of the ESG ratings/scores. Keep in mind, though, that this can create complexities as you seek to integrate various sources if you try to do it yourself. The reason is simple: There’s a lot to sort through and then manage over time. Companies, their products, and supply chains, for example, do not stay static.


Managing Your Portfolio's ESG Data

No matter how you collect your ESG data, the ability to compare companies and track improvements over time comes down to one must-have: proper data management and collection.

Intelligent sustainability software like Rio does the heavy lifting. With Rio, you can:

  • manage your ESG risk
  • save time and money by centralising your data
  • increase the visibility of your portfolio,
  • conduct ESG due diligence on targets, and
  • simplify your reporting and meet specific ESG requirements/legislations

Rio also incorporates streamlined workflows, built-in ESG framework requirements, real-time data visualisation, and easy data management.

How can Rio help you? Contact us at rio.ai or schedule a meeting/send us a message.