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As many of us have read in the media over the recent
years, the topic of corporate social responsibility (CSR) is a prevalent
theme of global proportions. More frequently, the issues around
CSR had been launched from the investor or shareholder perspective.
Increasingly, however, CSR is being examined from the traditional
financial-analysis perspective as well.
This shift represents a logical maneuver, as some would observe
that the ecology of social investment has ostensibly been a directive
from the investor to the investment, via the investment manager
to the investment research provider—and continues to rotate
from there. The demand side of such analysis peaks and oscillates
between the buy-side and the sell-side. Here are two examples of
mainstream initiatives below.
The burgeoning demand for robust environmental, social, corporate
governance (ESG) integration, in the context of established sell-side
sector analysis, was demonstrated by the dozen international buy-side
firm members of the United Nations Environment Program Finance Initiative
(UNEP FI) Asset Management Working Group, which in the United States
includes Calvert Group and ClearBridge Advisors (formerly known
as Citigroup Asset Management). That said, an unprecedented report
in 2004 was published through the UNEP FI Asset Management Working
Group, called “The Materiality of Environmental, Social and
Corporate Governance Issues to Equity Pricing,” whereby sell-side
firms incorporated ESG factors into their sector reports (such as
pharmaceuticals, apparel, utilities, etc.).
Two years later, the second report in the “Materiality”
series, “Show Me the Money,” was released this past
summer, and included additional sectors not covered in the first
report, such as forestry, food and beverage, autos, etc.
The significance of these reports is not fractional in the milieu
of forward-thinking yet evasive determinants of good corporate performance.
As most analysts would concur, sustainability in a “growth
of earnings” framework is viewed as one of the attractive
characteristics for an investment. Today, many investors would agree
that sustainability should be defined with ESG inclusion, and thoughtfully
applied in a holistic manner by capable analysts in the financial
community. To reiterate, the ESG components would not supersede
the investment analysis.
At the Socially Responsible Investing (SRI) Committee at the New
York Society of Security Analysts (NYSSA), the world’s largest
financial analyst member organization, there has been a steady increase
in the number of analyst and portfolio manager members joining the
SRI Committee—from a few dozen five years ago to about 100
members this year. Programming for the NYSSA members by the SRI
Committee have included almost 24 events focusing on industry-relevant
ESG criteria in the investment decision-making process.
Even in New York City, some analysts are dissecting data and observing
the potential influence of climate change on valuation models, as
manifested in cost of capital, carbon cap regulation and the price
of energy. This thinking is no longer the sole domain by residents
in California, Seattle and Vermont.
Given the relatively minimal text space for such an expansive and
vital topic, I will close here by citing an early adopter of ESG
analysis on the sell-side, Abbey Joseph Cohen—an investment
strategist at Goldman Sachs Inc.—who noted that the environment
is not just a “green” issue, but that there are important
implications to fundamental analysis that should be considered by
investors.
Mary Jane McQuillen is the director of the Social Awareness
Investment Program at ClearBridge Advisors, a unit of Legg Mason
Inc., and chairwoman of the Socially Responsible Investing Committee
of the New York Society of Security Analysts.
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