Do environmental, social and governance issues matter? ECCE publishes new results

(20 Mar '07)

The European Centre for Corporate Engagement (ECCE) has completed the first pilot study of the use of extra-financial information by European research analysts and investment managers. With more than 850 respondents from 88 sell-side and 240 buy-side institutions, it is one of the largest ever attempts at analysing how information relating to environmental, social and governance (ESG) issues is used in valuation and investment decisions.

 

Key findings of the report are:

• Evidence suggests a growing interest in SRI, but investors continue to manage only a small percentage of their assets on an SRI basis. ESG issues are currently integrated into mainstream investments only to a limited extent.
• Corporate communication practices relating to ESG seem to have improved, but many analysts and investors do not perceive that the companies provide enough information to allow effective assessment of these factors' impacts. 
• Major differences exist between sectors in the relative importance of various ESG factors.  
• Corporate governance criteria are the most important of all ESG factors across all sectors, and are seen by many research analysts and investors as forming a separate category.
• Extra-financial information is believed to have a higher impact on brand and reputation than on market value or financial performance. Differences are also noted between short-term and long-term impacts. 
• Companies that score high on ESG criteria seem to be rewarded with premium valuation, while companies that score low are likely to be penalised with valuation discount. However, low scores might have a more pronounced effect on valuation than do high scores.
• Many sell-side analysts indicate that their institution has not developed an ESG policy, which generally hampers the analysis of extra-financial information. Additionally, analysts who cover more companies focus less on ESG factors in their analysis.
• Sell-side analysts use extra-financial information to a lesser extent than investors, and highlight the lack of a universally accepted methodology for quantifying ESG data.
• Investors, in particular, large, long-only institutions, show more awareness of ESG policies and products than sell-side analysts do. Fund managers seem to use extra-financial information to a lesser extent than buy-side analysts, while hedge fund managers focus less on ESG issues than do other investor types.

 

The full report is available via the publications section.