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Turning limitations into positives

QUARTERLY NEWSLETTER • AUTUMN 2020, Connection

TURNING LIMITATIONS INTO POSITIVES

By Jennifer Hill

A lack of consistency across ESG ratings represents a challenge for investors – and an opportunity for active managers to add value…

ESG has become a big part of the investment world, but is it more substantial than a marketing gimmick? David Liddell, a director of online advisory investment service IpsoFacto Investor, concedes that it is easy to be cynical…

However, it is “quite plain” to Liddell that a robust investment process should now take account of ESG – and perhaps always should have. “A fundamental part of the investment process is assessing the future market environment for a firm’s products, the attitude and taste of consumers in society, and the ability of the company to govern and deliver on its plans – these should always have been pretty fundamental to assessing a company’s future cash flow,” he said…

Integrating a robust ESG approach into investment decision-making is also problematic. The CFA cites three problems: it is difficult to assign a monetary value to ESG issues and to integrate them into quantitative models; ESG-related disclosure by companies may be limited, unverified and nonstandardised; and ESG issues tend to influence financial performance in the long term, whereas many investors have relatively short-term horizons…

“There are an increasing number of ratings and index providers offering guidance, but the data sources and methodologies employed vary widely – comparing one to the other is like comparing apples with pears.” …

That is chief among the reasons for an over-reliance on ESG scores being unhelpful at best and dangerous at worst. “The investment world has a big role to play in shaping the future of the planet for the benefit of all of us – none of us should be passive investors in that regard,” said James Carthew, head of research at QuotedData.

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