Unsure how to use ESG analysis? Start with G, says RI expert

Deborah Ng, who’s been the head of responsible investing (RI) at Ontario Teachers’ Pension Plan for nearly two years, began her RI journey in 2007-08. She was a portfolio manager for OTPP at that time, and says the best way to get the industry interested in environmental, social and governance (ESG) analysis was to educate managers on why it matters.

That’s still true.

While RI portfolios are becoming more popular — with robo-advisors and fund providers even jumping into the space — managers still need help figuring out how and when ESG considerations can materially impact a company.

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Ng was one of three experts who took part in a panel called “New Frontiers in Security Selection” at CFA Institute’s Alpha and Gender Diversity conference this week. She was joined by Judy Cotte, head of corporate governance and responsible investment at RBC Global Asset Management, and Donna Anderson, vice-president and global corporate governance analyst at Baltimore, Maryland-based T. Rowe Price and Associates.

All three women lead active managers who, as part of their processes, assess whether or not companies are socially and environmentally conscious, as well as how companies are building more diverse leadership teams.

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To choose responsible names, RBC GAM’s managers use MSCI and Sustainalytics tools. Anderson says T. Rowe Price and Associates managers use internal analysis.

For Cotte, the composition and focus of companies’ executive teams is important. She views company-level ESG analysis as a pyramid: she places governance issues at the top because, she says, environmental and social issues often stem from how leaders run their businesses.

All three experts agreed that current ESG ratings are often based on how well companies recognize and disclose risks. But, over the next five to 10 years, investors will increasingly demand more information and action — as Cotte points out, there’s growing interest in RI from organizations and individuals alike.

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In reference to companies that are part of sustainable indexes but aren’t pulling their weight, Cotte says: “Pretenders will be outed.”

Ng predicts people will start looking beyond climate change in relation to ESG analysis. After all, there are 17 sustainable development goals to consider, and not all companies have a significant environmental impact.

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