Successful ESG integration: moving from why to how
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Recent regulatory developments suggest that environmental, social and governance (ESG) investing is neither a fad nor a subjective enterprise. Rather, it has become a critical part of day-to-day investment management. Global investor commitment to ESG and impact themed investing has evolved from a question about why ESG is important to how it can be most effectively implemented.

ESG investing is an evolving concept that currently lacks standardised definitions, consistency and a solid baseline for analysis and measurement.

Despite recent progress at the regulatory level and higher levels of issuer ESG disclosure, investors are increasingly relying on ESG information about companies, which can differ per third-party ratings, scores and other beta-type filters.

Much of that data hasn't been audited or contextualised around financial materiality and company fundamentals. A growing body of research supports a positive relationship between high

ESG characteristics and investment outcomes. However, as an investment factor, ESG continues to lack uniform definitions and a solid methodological baseline for security analysis. There continues to be no generally accepted accounting principles (GAAP) for ESG. The explanatory effect of ESG on returns in the context of stock market crises also remains subject to debate.

As a result, overreliance on popular guidance based on ESG overlays (such as ESG analysis separated from fundamental analysis) or inserts (top-down SRI screens) runs the risk of obscuring which ESG issues are financially material and under which valuation technique or scenario would they alter a company's solvency and growth trajectory over a given time-horizon.

The following represents a ten-step process which can be used for an ESG integration strategy:

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