ESG Integration Method in Investment Analysis
This article introduces the ESG integration method in investment analysis released by the CFA Institute. ESG integration refers to incorporating ESG factors into the investment analysis and securities valuation process.
The CFA Institute and the Global Sustainable Investment Alliance (GSIA) previously released definitions of key terms for ESG and responsible investment to provide standardized information for market participants.
Related Post: CFA Institute Releases Definitions of Key Terms in Responsible Investing
Introduction to ESG Integration Method in Investment Analysis
CFA Institute believes that the purpose of integrating ESG into the investment analysis process is to identify and evaluate risks and opportunities that cannot be measured by traditional financial data. CFA Institute encourages investors to consider ESG factors in investment analysis decisions. The ESG integration in investment decisions involves several steps, which are:
- Identify ESG information: When analyzing a company’s ESG data, investors may be faced with hundreds of ESG data points from different data sources (public company disclosures or third-party collections). Standardized ESG information disclosure mechanisms have not yet been established in many jurisdictions, so investors need to identify high-quality ESG information. Investors need to consider the source of the information, conduct quality checks on third-party data, and consider the rigor of the methods used in collecting the information.
- Assess the financial materiality of ESG information: After collecting high-quality ESG information, investors need to evaluate the financial materiality of the information and determine whether it can affect the company’s investment risks and opportunities. For unimportant information, investors do not need to include it in subsequent processes. Investors need to consider the company’s industry, location, and data characteristics (qualitative or quantitative), and determine whether it is financially material based on the investment period.
- Integrate results into the securities valuation process: After determining the financial materiality of ESG information, investors need to incorporate the impact of relevant ESG information into the valuation process and adjust the company’s financial ratios, valuation multiples, and modify changes in scenario analysis or robustness analysis. The integration process is directly related to investors’ own judgment of the importance of the information, reflecting the understanding of ESG risks or opportunities with different risk preferences.
Reference:
Guidance for Integrating ESG Information into Equity Analysis and Reports
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