ESG analysis: assessing company competitiveness and risk-adjusted returns
What is ESG analysis?
Also called extra-financial analysis, ESG analysis is essential for evaluating a company’s environmental, social and governance performance, over and above traditional financial indicators. It allows us to determine a company’s current and future market positioning in a world that is in constant flux. Combined with financial analysis, it provides a full picture of the company, instilling greater confidence in investment case studies and improving our visibility of the risk/return ratio.
ESG analysis aims to identify, assess and measure a company’s performance against social, environmental, and governance criteria. This involves factoring in “double materiality”, i.e. the impact of a company and its operations on the environment and its stakeholders, and their impacts on the company’s operations.
Key environmental indicators include greenhouse gas emissions, water consumption and waste management, while key social indicators include employee turnover, diversity and inclusion data, as well as working condition assessments. The materiality and importance of these indicators will vary depending on the company’s sector of activity. The third set of indicators, those of governance, are crucial for all companies, as boards of directors are examined for their diversity, executive pay and the transparency of financial reporting.
ESG analysis may be supplemented with an assessment of a company’s sustainability and impact to determine, for example, the extent to which a company’s products, services or operations align with the United Nations Sustainable Development Goals (SDGs).
How is this information accessed?
Access to extra-financial data has improved significantly over the years thanks to the efforts of investors, governments, and companies. Various frameworks and standards have also been established to align the type and quality of reported data. The implementation in 2023 of the European Directive (CSRD - Corporate Sustainability Reporting Directive) on the standards and format of sustainability reporting improves the quality of published information. However, certain areas, such as social and biodiversity issues, still require standardisation.
We access company data via their quarterly or annual reports or through extra-financial data providers, such as MSCI, Carbone 4 and Trucost. These providers also assess the quality of companies’ extra-financial data and ESG risk management, using proprietary modelling tools to calculate a company’s alignment with the Paris Agreement scenario*, for instance.
How is this applied in practice?
Whether through our portfolio management companies, or as part of the Private Bank’s advisory management for each investment case, it is important to analyse all material data, which differ from sector to sector. For a European industrial company, for instance, this means reviewing the initiatives implemented to reduce carbon emissions and help limit the costs related to ever-increasing carbon credits. In the tech sector, employee turnover and satisfaction are key indicators for measuring a company’s ability to maintain its level of innovation. Lastly, a good governance system is the starting point for establishing the reliability of the company’s financial statements.
What if ESG analysis reveals shortfalls in a company?
There is more to a sustainable investment approach than incorporating ESG analysis into financial analysis. There also need to be a strategy for engaging with investee companies or potential investee companies to encourage them to better incorporate extra-financial factors into their operations. It is essential to create a dialogue with companies that don’t have a decarbonisation strategy to support them in defining a transition plan that meets criteria including carbon footprint transparency, concrete and quantifiable objectives, and the appropriate governance for their strategy.
*An international treaty on climate change mitigation and adaptation, and the related financing needs, adopted by 195 nations on 12 December 2015 in Paris.
Article by our experts :
Petra Besson Fencikova : Head of ESG investments Societe Generale investment Solutions Europe
Diana Triana : Head of ESG research Societe Generale Investment Solutions Europe
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