Not all approaches to ESG are created equal—why a focus on integration, forward-looking dynamics and active engagement is the key to unlocking long-term returns in equity investments.
Investors are becoming increasingly aware of the positive changes they can effect on significant global concerns ranging from climate change to human rights. Indeed, in recent years, the question of considering environmental, social and corporate governance (ESG) factors as part of fundamental equity investment analysis has progressed from whether to how. As a growing number of market participants—from consultants and financial advisers to asset managers—incorporate ESG into their decision-making process, asset owners are presented with a wide range of potential options for fulfilling their ESG requirements.
Crucially, not all approaches to ESG are comparable, as they seek to deliver different outcomes. For example, while some asset owners may be willing to accept lower financial returns in order to achieve specific societal or environmental goals, others may only consider ESG from a risk-management lens. For asset managers, it is therefore imperative to understand the outcomes their clients are seeking.
In this paper, we describe the philosophies at the heart of Barings’ approach—and why we believe they are the most effective at delivering the desired outcomes for our clients. We also demonstrate how they are implemented across our global equity platform.
Why Focus on ESG?
Before going into the specifics, it is worth noting why we focus on ESG to begin with. At Barings, we believe ESG analysis is critical for two overarching reasons.
The first reason is economic return. Simply speaking, we believe taking ESG factors into consideration gives a holistic view of an investment. It allows our investment professionals to better assess both the potential risks facing the company and the opportunities presented to it, particularly those that may not be apparent or included in traditional fundamental analysis. Having a more complete picture is also crucial for improving our confidence in the investment thesis of a company. In particular, it strengthens our belief that our 5-year earnings forecasts will be delivered by the company. Furthermore, it helps our analysts to determine which of those factors may impact the value of the company over the time horizon.
Second, and equally as essential, we aim to identify sustainable business practices and unlock opportunities for our clients while propagating better ESG practices and improved disclosure across the industries and businesses in which we invest. We strive to use our influence to create equitable outcomes and drive positive change, which is consistent with our commitment as signatories to the UN’s Principles for Responsible Investment and UN Global Compact.