When investors look to make a substantial buy into a company’s stock, one thing they look for is sustainability in a company’s operation. This means that ESG integration needs an in-depth blueprint in order for it to function well and be resilient to change.
“For many years, evidence has mounted showing that corporations with sustainable business models deliver improved financial returns,” says Georg Kell, Chairman of Arabesque and Founder of UN Global Compact. “Investors who consider ESG issues in their strategies can achieve better performance.”
Information gathered on companies from ESG reporting is showing that sustainable initiatives are not only possible, but also profitable. Culture Capital, an investment management company, gathers information based on the relationship between company culture and sustainability.
Culture Capital eliminates companies from prospective investments who fail to understand the importance of corporate culture as an asset.
“Culture broadly defines how an organization operates and its purpose,” says Geoffrey Burger, CEO, Founder and portfolio manager of Culture Capital. “A company’s culture is reflected in many ways that can be observed and measured such as employee retention, diverse leadership, community involvement and other actions both positive and negative.”
Corporate culture should be measured quantitatively, according to Culture Capital, if ESG reporting is going to contain accurate data for investors.
“With material ESG data becoming ever more accessible, more investors are searching for ways to capitalize on this information,” says Kell. “An approach that I believe represents the future of sustainable investment is ESG quant, which capitalizes on the emergence of ESG big data.”
“Big data” includes news, corporate reports, ratings, websites and financial reports. By using big data, companies like Culture Capital can establish a sustainability grade that guides investment and portfolio decisions.
“Companies should not develop a sustainability reporting strategy by asking investors ‘What do you want in our ESG reporting?’,” says Burger. “That is putting the cart before the horse.
“CEOs need to tell investors about their firm’s purpose, and their strategy to invest in a company culture that will foster and support the company’s purpose. Then provide investors specific timelines and investments to achieve those strategic goals. We use Datamaran to incorporate this complex and expanding data into our valuation model, as it provides a lens into these unstructured datasets.”
Moving forward, investors can align their own expectations with the company’s efforts toward sustainability and long-term financial returns of the business. Using ESG quant data may help CEOs developing their firm’s strategy.
While quantitative measurements have been traditionally focused on information gathered from financial reports, sustainability information has been mainly used for the development of qualitative strategies.
“Why ESG quant is so exciting is how it merges the two,” says Kell. “Material ESG factors are treated as valuable intelligence which, when integrated with fundamental analysis, can provide the investor with a more holistic understanding of a company’s performance.”
However, in order for ESG quant-data to be worth anything, there must be a balance of profit increase between all recorded quantitative and qualitative data.
Says Kell, “As the quality, frequency and consistency of sustainability data continues to improve in the years ahead, so too will the potential for ESG quant-based strategies to deliver enhanced, risk-adjusted returns for the investor.
“With funds actively now demonstrating how this strategy can outperform conventional equity approaches, the future is set for sustainability to move into the mainstream.”
Both Kell and Burger will be featured at the ESG Integration Summit at Nasdaq in Stockholm, Sweden on August 29. Kell will be giving an opening keynote presentation on Exchange Guidance & Recommendations: Developing Well Functioning, More Resilient and Less Volatile Markets, and Burger will be a panelist for the Data Trends: How Data Builds the Investment Case for ESG.