Ethical/ESG integration is a part of our approach to portfolio construction. Together with financial analysis this give us a clear understanding of the key issues that need to be taken into account when making an informed investment decision. Therefore it is a combination of the analysis of a specific issuer using the credit ratings analysis of an organisation in addition to how we assess them using our Ethical/ESG scoring of each of the issuers.
Understanding the financial statements in any investment is important however there are other aspects that need to be analysed when assessing the profitability of an organisation. There are many Ethical/ESG issues that an investor needs to be aware of as there is the potential for these to have both a negative and positive impact of the performance of an organisation. Therefore governance is a good starting point and understanding if an organisation has the appropriate governance structures in place.
Each organisations Ethical/ESG score has a component of governance, environmental and social as a percentage weight in its scoring. Therefore a good governance score tends to assist in the environmental and social scores, which are all included to give us an Ethical/ESG score for each issuer. Poor governance scoring or overall poor Ethical/ESG score can be an indicator that there are some issues within the organisation and can be a flag for concern and an indicator for deeper investigation. On the flip side to this an advanced or high Ethical/ESG score can be a good leading indicator that this organisation is and continues to manage the organisation in a positive manner and its actions will assist in the profitability of the organisation.
Therefore it is combination of the issuers credit rating (financial statement analysis) and ESG score in assessing the viability of an organisation for investment.