What ESG integration is and is not

ESG integration is fundamentally about the evaluation of corporate governance, environmental and social (ESG) considerations. It can also include an analysis of non-traditional financial issues, such as damage to a company’s brand. These considerations provide deeper insights and may provide a more holistic and forward-looking perspective into a company’s investment risks and opportunities. In short, ESG considerations recognize that the world is changing. And it allows for a more complete analysis of a company’s future potential prospects and viability.

ESG integration can’t be addressed without first considering the spectrum of capital or range of investment solutions. The capital spectrum includes traditional (financial-only), sustainable and impact-oriented investment approaches (chart below). Responsible or social approaches, date back the 18th Century.1 These tend to be values oriented, such as avoiding industries like weapons manufacturing.  Meanwhile, sustainable and impact approaches generally strive for positive returns and positive outcomes, with impact generally associated with outcomes that are intentional, quantifiable, and lasting.

1 Sources: A short history of responsible investing, Schroder, 20 November 2016; A short history of responsible investing, Corporate Knights, May 11, 2021.

The spectrum of capital

This graph is an encapsulation of the preceding paragraph. ESG is a spectrum that goes from delivering competitive financial returns to focusing on measurable high impact solutions.

Source: G8 Social Impact Investment Taskforce, Asset Allocation Working Group (2014).

ESG considerations

ESG issues impact every company, sector, and region around the globe. They play an important role when determining future prospects and cultural traits. These traits span innovative culture, employee culture, culture towards stakeholder relations, operational culture, and more. And these considerations may feed into valuations.

Several examples of ESG issues are shown in the table below:

Environmental

Social

Governance

Energy consumption

Human rights

Quality of management

Pollution

Child and forced labour

Board independence

Climate change

Community engagement

Conflicts of interest

Waste production

Health and safety

Executive compensation

Natural resource preservation

Stakeholder relations

Transparency & disclosure

Animal welfare

Employee relations

Shareholder rights

Source: SLGI

On an aside, the integration of sustainable practices across an organization’s core business may also be termed Corporate Social Responsibility (CSR), although many organizations have a separate (often philanthropic) CSR “carve-out” that is distinct from their approach to sustainability.

How ESG considerations influence research and investment decisions

The graphic below illustrates how ESG considerations may allow for a better understanding of a company’s ability to mitigate risks and explore opportunities. It also addresses how these same assessments potentially influence the estimation of financial metrics. 

An understanding of ESG issues allow for a better understanding of the business across multiple aspects which enables deeper visibility into direct and indirect financial impacts over time and thus provides additional information that can be embedded into short- medium- and long-term. 

ESG at SLGI Asset Management Inc.

Incorporating ESG factors into every step of our investment process is a key part of strategy. Moreover our commitment to ESG integration extends to our sub-advisors. They must clearly show how ESG considerations factor into their investment analysis and decision-making. This not only gives us more confidence in the sustainability of value generation, it also helps manage risk – which sits at the core of our investment philosophy.

It does not end there. We rigorously assess and evolve our portfolios, measure results and submit annual reporting to the UN’s PRI program. This transparency validates our drive to firmly integrate ESG considerations into our investment process.

Information contained in this article is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities.  Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Please note, any future or forward looking statements contained in this article are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this article.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.

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