How we integrate ESG into investment decisions
ESG stands for Environmental, Social and Corporate Governance. The ESG score expresses how much a state or company does for environmental protection, society and good governance and is important for the sustainability analysis. That's why we integrate ESG criteria into the investment decisions for sustainable products.
Sound investment decisions thanks to ESG
The ESG score is important for our holistic sustainability analysis. Thanks to the ESG criteria, we gain in-depth insight and can better analyse intangible assets: how innovative is a company really, how much is the brand worth, how strong is stakeholder engagement and how are employees treated? For this reason, the sustainability analysis complements the financial analysis in our active management of traditional investments. Management that under-emphasises soft factors while over-emphasising short-term goals usually acts against the interests of long-term and sustainable investors.
How do you benefit from ESG?
Investments in the securities of governments or companies with a low ESG score often have an additional risk that cannot be offset.
- In the case of bonds, the analysis of ESG data helps to identify risks in good time. Systematic integration can therefore work to protect against credit defaults.
- In the case of equities, companies that benefit from the sustainability trend can be identified at an early stage. We are convinced that this has a positive effect on the risk-adjusted return.
ESG integration taken to the next level
We have further developed traditional ESG analysis so that we can ensure a high level of information across different asset classes and types. In order to take all the particularities into account, we use tailored data sets for each asset class. Conventional ESG analyses primarily capture the operational sustainability efforts of a company or state – i.e. how sustainably a company or state is managed.
To obtain a differentiated picture, we supplement our analysis with important aspects such as the environmental and social consequences of the business activity, the effects of the products and services or controversial aspects.
How we overcome the reporting gap
We obtain our ESG data from several providers. Some data is more relevant to us than others. The greatest challenge comes from the reporting gap: there is more data on large-cap companies from developed countries than on small-cap companies in developing countries. On the one hand, this is because most providers primarily use English-speaking sources. On the other hand, smaller companies cannot afford the effort required to meet the standards in external reporting. To take this into account, we work with proprietary ESG ratings, which we calculate with raw data from different providers. We focus on what's important and remove any distortions. This way, we can meaningfully interpret the information on intangible assets and use it in a targeted manner to manage opportunities and risks.
Environmental, Social and Corporate Governance
ESG turns the "magic triangle" of investing into a square: return, security, liquidity and sustainability. What's behind the three letters E, S and G?
Environmental
Environmental
This involves questions such as whether a state or company uses renewable energy, handles energy and raw materials efficiently, produces in an environmentally friendly manner, has little impact on air and water, pursues a strategy for climate change and, especially importantly, reduces its CO2e emissions.
Social
Social
This involves questions such as whether states or companies comply with labour rights including the prohibition of child labour or forced labour, do not discriminate against people, comply with high occupational health and safety standards, pay fair wages, grant freedom of association and trade unions and advocate sustainability standards with their suppliers.
Corporate governance
Corporate governance
This involves questions such as whether a company behaves correctly, combats bribery and corruption, has anchored sustainability management in corporate management and the board of directors, has linked remuneration for the board of directors to sustainability targets and how whistleblowers are handled.