A new investment style has emerged during recent months, say two leading analysts.
Meg Brown and Mike Tyrrell, sustainable investment analysts at
Citigroup, say they have observed more socially responsible investment
managers adopting what they call a ‘financially weighted best-in-class’
approach.
This differs from conventional best-in-class analysis, under which fund
managers identify environmental and social risks and opportunities in
an industry sector and draw up a short list of the companies responding
most effectively to them.
By contrast, those using the new approach weight environmental and
social factors based on their potential financial effect and not
according to their environmental or social impacts.
Brown and Tyrrell say that the conventional best-in-class approach
enables an investor to identify, for example, power generation
companies with superior environmental and social performance relative
to their peers. The same is true of a financially weighted
best-in-class approach, but throughout the assessment process
‘considerably greater prominence’ is given to those social and
environmental issues most likely to affect the investment performance
of the companies. In power generation these might be carbon trading and
nuclear waste disposal.
Brown and Tyrrell, outlining their findings in a research note, say
they have seen the trend emerging at company briefings in which SRI
analysts and investors have devoted about half their time to ‘broad
sustainability governance’ and half to specific investment themes.
Brown said the financially weighted best-in-class approach seems to be
testing the ‘broad assumption’ that ‘companies that outperform on
environmental and social grounds will outperform financially’. This
suggested either that investors were sceptical that companies with
superior social and environmental performance were better investment
prospects, or reflected their ‘desire to unpick the constituent parts
of the thesis in the search for even more value creation’.
Brown added: ‘Either way it lends weight to our broader [theory] that
sustainability analysis will become ever more integrated into financial
analysis.’
The emergence of this new approach highlights the growing gap between
sustainability aims and materiality requirements in investment
analysis. Christophe Butz and Stephen Barber of Pictet Asset Management
recently noted in a research paper that ‘materiality for the company
has strictly nothing to do with the sustainability [of a company’s]
actions.’
