Assessing Environmental, Social, and Governance (ESG) factors is hard. In fact, ESG due diligence is one of the most fluid and tough-to-grasp facets of Asset and Wealth Management research.
The heat is on portfolio managers to integrate real-world sustainability factors into their investment products, without compromising financial performance. Yet ESG due diligence is constantly undermined by unreliable data, unclear criteria, and rampant subjectivity.
Which means Asset and Wealth Managers – particularly those with limited research capabilities – are forever fighting an uphill battle to apply true ESG application to their stock picking processes.
In this post, we’ll talk about the role of ESG due diligence, how to create a repeatable ESG assessment process, and the tools you can use to make smarter sustainable investment choices.
What is ESG Due Diligence?
Every portfolio manager needs to make sure any equities they invest in are of good quality. There are lots of different ways to assess a stock; researching quantitative, fundamental, and qualitative factors through a bottom-up or top-down approach can offer a strong indicator of whether a company is worth investing in.
While these traditional investment methods are tried and trusted, there’s no industry-standard ESG due diligence methodology.
Because the topics within ‘Environmental’, ‘Social’, and ‘Governance’ are so broad and subjective, there’s no common consensus to ESG due diligence – meaning an investor’s goals will often dictate their research. On top of that, there’s often limited data on specific facets of ESG factors – for example, how would you accurately assess a company’s commitment to diversity?
But while there’s no set screening methodology, you can still use a variety of moves to tease out ESG factors from potential investments.
Assessing how ESG factors relevant to a potential investment could create new opportunities or risks – including any impact on financial performance, reputation and long-term sustainability.
Tied to this, you need to identify key risks, including regulatory non-compliance, reputational damage, supply chain disruptions, or legal liabilities. As legal and regulatory restrictions tighten, it’s never been more important to make sure ESG opportunities are above board.
Engage with key stakeholders, like company management, employees, customers, and subject matter experts. These conversations will give you insights into the company’s attitude towards ESG and whether it incorporates sustainability into its practices.
Underpinning all of this is data: portfolio managers need the most relevant information from a wide variety of sources, including company disclosures, sustainability reports, and third-party data providers.