At the heart of ESG analysis: assessing the competitiveness and risk-return of companies
What is ESG analysis?
Non-financial analysis, also known as ESG analysis (Environmental, Social, Governance), is essential for evaluating a company's performance beyond its traditional financial indicators. It allows us to determine the current and future market positioning of a company in a constantly evolving world. When combined with financial analysis, it provides a more comprehensive view of the company, enhancing confidence in investment case studies and providing greater visibility on the risk-return relationship.
ESG analysis aims to identify, assess, and measure the social, environmental, and governance criteria of a company. Dual materiality must be taken into account: the impact of the company and its activities on the environment and stakeholders, as well as their impact on the company's operations.
Key ESG indicators for the environment include greenhouse gas emissions, water consumption, and waste management. Regarding the social aspect, relevant indicators include employee turnover rates, diversity and inclusion metrics, and evaluations of working conditions. The materiality and importance of different environmental and social indicators vary depending on the company's activities. Finally, governance is essential for every company, and it is important to examine the board structure, diversity, executive compensation, and transparency of financial reporting.
ESG analysis may be complemented by evaluating a company's impact and sustainability, such as understanding how its products, services, or activities align with the United Nations Sustainable Development Goals.
How to obtain the data?
Over the years, access to non-financial data has significantly improved thanks to the efforts of investors, governments, and companies. Various frameworks and standards have been established to harmonize the type and quality of reported data. The implementation of the European Directive (CSRD - Corporate Sustainability Reporting Directive) in 2023 on sustainability reporting standards and formats aims to improve the quality of published information. However, harmonization is still needed, especially in social and biodiversity aspects.
In practice, we can access this data through companies' quarterly or annual reports, or through various providers of non-financial data, such as MSCI, Carbone 4, and Trucost. These providers can also assess the quality of non-financial data and companies' ESG risk management. Using proprietary modeling tools, they can calculate, for example, a company's alignment with the Paris Agreement scenario1.
How is it implemented in practice?
In our portfolio management companies, or within the Private Banking advisory, it is important to analyze material data, which varies depending on the company's sector of activity. For example, for a European industrial company, it will be necessary to examine initiatives to reduce carbon emissions, which can limit the costs associated with carbon credits, which are constantly increasing. In the technology sector, employee turnover and satisfaction are key indicators to measure the company's ability to maintain its level of innovation. Finally, good governance is the fundamental basis for establishing the reliability of a company's financial statements.
What if ESG analysis reveals weaknesses in a company?
The approach to responsible investment does not stop at integrating ESG analysis into financial analysis. Developing an engagement strategy and engaging with companies in which to invest or consider investing is also important. This involves ensuring that these companies better consider non-financial factors in their activities. Finally, it is crucial to prioritize dialogue with companies without decarbonization strategies, encouraging them to define a transition plan that meets criteria such as transparency of their carbon footprint, the implementation of concrete and measurable objectives, and appropriate governance around this strategy.
1An international treaty on mitigating and adapting to climate change, as well as on their adequate financing, was adopted by 195 nations on December 12, 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
Petra Besson Fencikova
Head of ESG investements Societe Generale Investment Solutions Europe
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