Watching links between ESG and financials

Industry Interviews

A sharp ESG profile should be coupled with clear financial performance, according to NN Investment Partners.

“Many investors and asset owners think ESG is something on the side,” said Adrie Heinsbroek, NNIP’s head of responsible investment, who oversees ESG implementation across strategies. “To me it is fundamentally [about] economics, because in the end it is about how a company can maintain profit.”

Heinsbroek said that his team monitors the ESG performance of the firm’s investments and should an ESG indicator raise an alert, analysts talk to company management and assess the risk.

For example, the team looks for a mismatch in ESG profile and company financials. The two indicators should have a satisfactory correlation.

“If a company is fantastic on ESG but financially is not very smart, why should we invest in it? We look for the ones that are also financially sound,” he told FSA on a recent visit to Singapore.

Another alert is a strong possibility of change – positive or negative – in a company’s ESG profile.

A company with a poor ESG policy requires deeper scrutiny. It could be a reason to sell or modify a position, because lagging ESG indicators may be negatively impacting financial performance. But the company could also be on the cusp of positive change.

Heinsbroek cited an example of an NNIP manager who decided to buy the US dollar- denominated bonds of a state-owned Chinese company that had been investigated for graft. The decision was made after a newly-appointed chairman took over “with the aim of cleaning up the company and reverting it back to its core business”, he said.

“Valuation levels suggested that corporate governance risk was still priced into the bonds, [therefore] we believe this presented an attractive opportunity to add exposure.”

Asia data difficulties

In Asia, for various reasons it is still more difficult to access ESG-related data than in Europe or in the US, Heinsbroek said. Often the company simply does not have the data.

“Companies or issuers may also have difficulty understanding what investors would like to see or why they would need to have this kind of information.”

He cited as example data on human capital, such as education spent per employee or reporting on carbon emissions.

“A solution to overcome this is for stock exchanges to require companies to disclose ESG information or for investors to request more ESG disclosure. This will accelerate information availability and can help to further mainstream ESG.”

Heinsbroek said he tries to overcome the information challenge by buying data from research providers, talking to a company’s management and developing proprietary ESG tools.

“For example, we have a company-wide tool where analysts and portfolio managers register the engagement conversations with companies and issuers on all the ESG topics that were discussed.”

The wide variety of questions has led to a guide for team members to use in asking management ESG questions related to the sector.

“This guide also helps to categorise topics and enables us to have better sector insights which can be used for flagging issues that are not only company but also sector-specific.”

ESG everywhere

Heinsbroek believes sustainability factors are pressuring Asia companies to change as ESG spreads across multiple industries at an accelerated pace.

Oil and gas companies that want to stay relevant now will need to make significant moves into renewable energy, he said.

If palm oil companies want to grow, they now need to have “a proper ESG policy, such as how they treat their workers, how they clear the land or how are they going to acquire new plantations.

For all industries, data protection has become a social issue under the banner of ESG. “As we have seen in the misuse of data by companies such as Facebook, we should be mindful in ensuring, for example, that automobile makers and mobile phone producers should use the data only for customer servicing and not for other purposes.

“Suddenly, many things have become ESG issues.”

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