An article by Our Vice President Antti Raappana

Taking a closer look at ESG and its role in investment analysis

Financial Times successfully initiated a debate about the future of capitalism (18.9.). Criticism is sharply speared into the traditional shareholder profit maximation model of corporates as well as the alignment of this approach with the limits of sustainability (both social and environmental). Opinion comments by Elina Mikkola and Esko Muhonen (HS Opinion 22.9.) brought up the need to use broader well-being indicators parallel to economic growth (Mikkola) and highlighted sustainability as part of a company’s strategy (Muhonen). In addition, Helsingin Sanomat (6.10.) covered the newly selected Investor of the Year Julia Thuren’s approach of emphasizing responsibility as a factor when making investment decisions. Institutional asset owners (like pension funds) and companies offering investment services (for example fund managers and financial advisors) are putting more weight on Environmental, Social and Governance (ESG) factors. There are already 40 Finnish entities that are signatories of The United Nations Principles of Responsible Investment (UN PRI). (https://www.unpri.org/signatories)

The trend seems to be clear; Consideration of ESG factors is rapidly growing in the financial industry. Furthermore, there is an increasing acceptance within investment managers and corporate leaders, that understanding, managing and reporting of material ESG factors is an essential part of a simply smart, sustainable corporate strategy and that addressing material ESG factors will lead to share- and stakeholder value growth in the long term. One can expect that a trend towards ESG integration will further strengthen due to increasing demand from clients and beneficiaries but also due to expected future regulatory requirements. According to CFA (Chartered Financial Analyst) Institute, when conducting research or making investment decisions, an analyst or portfolio manager is required to consider all material information impacting the value of the investment. Consideration of material ESG factors is consistent with this requirement and can be seen as an important component of a thorough analysis. (https://www.cfainstitute.org/-/media/documents/article/position-paper/cfa-institute-position-statement-esg.ashx)

Hence there is a growing consensus that ESG factors are an integral part of the financial decision-making process. Management of ESG factors influence for example the company’s ability to manage climate change related short- and long-term risks, or the ability to benefit from the advances in new technologies. Certainly, the situation between different industries and companies vary. But one can argue that merely looking at the financial statements, likely will not give a complete understanding of the long-term value expectancy of a company. A paradigm shift among investors, especially when expressed through active ownership, increases demand and puts pressure on companies and their subcontractors to adhere and contribute to sustainable policies and to report material ESG factors and procedures together with financial reporting.

CFA Institute and the local CFA Societies encourage their members to lifelong learning and professional development. The financial services industry is experiencing a powerful shift as the industry practices (for example digitalization, cost pressure) are changing and with growing expectations and demands from customers and the society at large. (https://www.cfainstitute.org/en/research/survey-reports/future-state-of-investment-profession). The need for new skills and professional development is evident. To address the increasing requirements of ESG, CFA Society UK has launched a “Certificate in ESG Investing” (https://www.cfauk.org/study/esg) level 4 training module. You will be able to earn the ESG certificate from the 2nd of December 2019 onwards. We encourage you to take a closer look into this new and extremely topical training.