We believe today’s corporate landscape is more competitive than ever before with profound implications for corporate strategy, governance and reputational risk. Companies will need to be able to adapt to increasing scrutiny from customers and clients to preserve and grow value and ultimately become the source of long-term returns for investors. Within GSAM Fundamental Equity, we seek to own companies with sound and sustainable business models for the long term; thus assessing ESG practices forms a crucial component of the fundamental analysis we conduct on every company.
The biggest challenge is data, in particular the measurability and materiality of available ESG data. Measurability concerns include the challenge of quantifying many E, S and G factors (for example how do you assess corporate culture?). Quantifiable metrics are backward looking, have low disclosure levels (especially in EM or small cap) and lack standardisation. This results in sub-optimal 3rd party scores, which vary significantly by provider and often lack appropriate human intuition. Despite the explosion of ESG data, the majority of this is vague and immaterial to stock performance (>80% of ESG data is on policies rather than material/numeric metrics). This explains why we see a negative correlation between levels of disclosure and returns.
In our view investors cannot take a 'one size fits all' approach to assessing ESG practice. In line with this belief we have developed a proprietary, materiality of risk based framework. We integrate ESG factors that we believe are relevant to a firm’s growth, profitability and long term sustainability. While governance factors can be applied holistically, material environment and social considerations vary by industry and are informed by our proprietary view and the Sustainability Accounting Standards Board (SASB) materiality map. Even with this robust framework, we still believe that human judgement is crucial in determining what is important and what is not. Our team of 80+ investors is based across 6 locations and has 16 years of average investment experience. Our investors are specialised by sector and region and conduct 10,000 meetings annually to help inform our bottom-up research and ESG assessment. This direct engagement also allows us to promote positive change within the businesses we invest, driving benefits for all stakeholders.