![]() ![]() Stage 3 – Portfolio construction: The analysis performed in steps 1 and 2 lead to buy, sell or hold decisions. Analysts then use a variety of valuation models to determine an estimated intrinsic or fair value of the stock all can be adjusted to reflect ESG factors. But a more thorough integration of ESG factors takes these into account during the process of analysis and forecasting in the first place. Stage 2 – Forecasting and valuation: Traditionally, many investment managers would make forecasts of a company’s key financial metrics (earnings, cash flow) and then subsequently adjust these to take ESG factors into consideration. The analysis stage is also key for investor stewardship, as investors can identify potential operational improvements that can be pursued through engagement with company management. Resources such as the financial materiality maps from the Sustainability Accounting Standards Board can be used as a starting point. When considering ESG factors, analysts also need to consider their materiality – how significant they are for the company in question. These can be considered at regional and sector level, as well as their impact upon individual stocks. Stage 1 – Analysis: Investors can include ESG megatrends such as climate change alongside their consideration of economic and geopolitical conditions. ESG integration in active fundamental strategiesĮSG considerations can be brought into the processes of fundamental analysis, forecasting, valuation and portfolio construction in a variety of ways but responsible investors should treat it as core to the process, not an add-on. Therefore, these sections also look at how to implement stewardship activities. Additionally, stewardship activities (voting and engagement) are not easily separable from the investment process, because stewardship is informed by, and feeds back into, insights gained during the investment process. This module consists of three sections, each focused on a particular investment style: active fundamental, active quantitative and passive investments. This includes clearly defined roles and responsibilities staff training and education on ESG issues and appropriately structured fee and remuneration arrangements. Sound governance is therefore key to ensuring accountability. Governance arrangements ensure that the commitment to responsible investment is followed through by firms. The PRI has compiled a searchable database of responsible investment policies from more than 1,500 investors, which our signatories can review, adapt or develop from as they consider their own approaches. These have evolved rapidly in recent years into sophisticated documents with a wealth of detail on ESG practices. ![]() This guide will explore how PRI signatories are integrating ESG into each.įigure 1: ESG integration in listed equity: a five-part processįirst, investors will set their intentions, and make public commitments, through a responsible investment policy. The listed equity investment process can be split into five stages, which in practice form an investment cycle, as shown in Figure 1 below. The PRI defines ESG integration as “the process of including ESG factors in investment analysis and decisions to better manage risks and improve returns”. Materiality: Increasing recognition that certain ESG factors can affect risk and returnĮSG integration in listed equity: A five-part process. ![]() Sustainability outcomes: Growing interest from investors and other stakeholders in examining how investment decisions affect real-world outcomes.Regulation: More guidance from regulators that considering ESG factors is part of an investor’s fiduciary duty.Client demand: Growing demands from beneficiaries and clients for greater transparency about how their money is invested.There are four principal drivers of this progress: Investors are also increasingly willing to wield their voting power and collaborate in holding companies to account. PRI data shows that the integration of ESG factors into listed equity analysis and investment is widespread among our signatories. For the full version, including signatory practice examples and case studies, please click below:ĭownload full PDF guide Background and drivers This online summary version of the guide provides an overview and introduction to the content. Introduction to Responsible Investing Academic Research.Private retirement systems and sustainability.UN-convened Net-Zero Asset Owner Alliance.Environmental, social and governance issues.Strategy, policy and strategic asset allocation.Introductory guides to responsible investment.PRI China Conference: Investing for Net-Zero and SDGs.Diversity Equity & Inclusion for our employees.What are the Principles for Responsible Investment?.
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