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Dear Fellow Supporters of Integrated Reporting,
 

I am writing to announce yesterday’s publication of a paper The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG that I wrote with Mirtha D. Kastrapeli, the Head of Sustainable Investment Research at State Street’s Center for Applied Research. You can read an overview of the paper in this press release from State Street.  
 
The paper is based on two global surveys focused on “ESG integration in the investment decision-making process.” The first one covered 582 institutional investors, evenly split between asset owners and asset managers. and equity and fixed income. Those surveyed were implementing - or were planning to - ESG investing in some fashion. The second one covered 750 retail investors, including some who don’t practice ESG investing. Our paper focuses on the results of the institutional survey with some key findings from the retail survey. We plan to be writing more about both surveys in the future.
Our central finding—and not a surprising one to those familiar with this topic—is that the biggest barrier to ESG integration (a particular strategy under the broader umbrella of ESG investing) is the lack of standardized, high quality data on ESG performance. We discuss various ways in which this issue can be addressed. We also suggest a simple five-element model for ESG integration based on:
 
(1) Take Ownership
(2) Get Educated
(3) Align Time Frames
(4) Ask
(5) Incorporate Materiality Filter
Perhaps more surprising is that three things commonly cited as barriers to ESG integration were not as prominent as many think:
(1) the perception that incorporating ESG factors hurts performance
(2) the fiduciary duty of fund trustees precludes ESG integration, and
(3) investors have unrealistically short time frames for achieving outperformance from ESG integration (although their time frames for measuring performance and for compensation decisions are indeed too short).
There are two striking findings I’d like to point out. The first concerns materiality, and the second concerns analytical models. In terms of the former, a remarkable 92% of the respondents in the institutional survey said they want companies to identify what they consider to be their material ESG issues and to report on their performance on them. Also striking is the fact that two-thirds of respondents wanted the board of directors to make this determination vs. 38% for the Chief Sustainability Officer, and 32% for the Chief Executive Officer. The fact that only 14% cited the Chief Financial Officer and the Head of Investor Relations suggests that the market doesn’t perceive the finance function to be knowledgeable about the relationship between ESG and financial performance.
 
Which takes us to analytical models showing the relationship between material ESG issues and financial performance. Two-thirds of respondents believed it was possible to create such models. Of course, their quality will be a function of the quality of the ESG data they are based on, which takes us back to the biggest barrier: the lack of standardized, high quality data on ESG performance. The work of the Sustainability Accounting Standards Board has an important role to play here. Also important are new “big data” technologies including natural language processing, artificial intelligence, and machine learning. 
Accompanying this paper, today the PRI has published a, “The Roadmap to Full ESG Integration,” that Mirtha and I did with Danielle Chesebrough, Senior Manager of Investor-Company Relations with UN Global Compact at Principles for Responsible Investment. It is available on this page of the PRI website.
Listen now
I hope you enjoy both the paper and the podcast. More importantly, I urge all of you to think about what you can do to further the cause of ESG integration in the investment decision making process. It is good for financial returns and it is essential for creating a sustainable society.
 
  Kind regards,



  Bob






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Saïd Business School · Park End Street · Oxford, Greater London OX1 1HP · United Kingdom