The EFGAM rating system outlined in the below article has been developed to integrate ESG criteria into our investment process and financial analysis.
We believe the integration of ESG data can improve our understanding of the companies we invest in and can potentially force some positive improvement for the society and the environment we live in. We however recognise that ESG ratings are still in their infancy and may face some issues; there is the potential for different methodologies to produce conflicting results and being presented with a black box approach may make outcomes difficult to comprehend. To best meet the needs of our clients, fulfil our due-diligence requirements and remain responsible for our judgements we built an internal approach to ESG analysis.
The production of an ESG rating is the start to potential discussions and engagement activities with invested companies to promote better and less risky behaviours. Our work is to try to detect, in every industry and sector, which are the companies that face less risk or are better prepared to face future challenges.
To reduce the subjective nature inherent in ESG factor analysis EFGAM has outlined a few important guidelines:
i. Issues must be clearly identified and prioritised according to the characteristics of the industry.
ii. The definition of criteria used to identify what is material and what is not, needs to be clear and transparent.
iii. Criteria should be flexible as different information can have a different weight for the various stakeholders.
iv. The process needs to be rigorous and replicable.
v. It should be practical and simple enough to be used and communicated.
In the process of applying these guidelines there are three key areas in which work is needed to come to an overall rating:
i. Research: finding the required information;
ii. Developing a framework: for organising information in a coherent set of Key Performance Indicators (KPIs); and
iii. Producing a rating: which requires an assessment of which issues are material and how they should be weighted together.
For in depth detail on each of these stages and our rating methodology please download the full version of the report below.