Investors increasingly embrace environmental, social and governance measures as a potential source of superior risk-adjusted returns. And that leaves advisors with additional challenges: identifying companies that manage ESG risks well, or selecting portfolio managers that incorporate ESG analysis as part of their process.

Some data providers, such as MSCI or Sustainalytics, generate scores for public companies based on their performance on ESG measures. But those scores are usually backward-looking and typically updated annually or semi-annually. They also are diverse; an examination of two leading providers found only 50% correlation and often an inverse relationship between the scores. This reflects the fact that these quantitative ESG scores are based on qualitative analysis, which relies on how important or material a particular practice or measure is considered to be.

Another challenge is the disclosure by companies themselves. For a portfolio manager, ESG issues such as water usage, worker safety and emissions can be tracked with publicly available data — but not in a consistent way. The data isn’t reported in a uniform manner across companies from year to year (as financial information is). The Global Sustainable Investment Alliance are trying to impose some standards of uniformity and coherence so investors can compare individual companies, but they still have a long way to go.

But assessing ESG performance requires more than a score. Many of the material issues that matter to responsible investors are not adequately reflected in quantitative scoring. They require a more nuanced analysis in the context of business strategy and enterprise value to understand the risks and opportunities embedded in a specific business. To truly assess ESG performance an advisor should complement the external ESG research with their own analysis, which may include directly engaging with companies to better understand how they are managing ESG-related risks and opportunities.

So while ESG company scores only tell part of the story, you can get a better understanding of how advisors are incorporating ESG considerations into their investment process. Here are some questions to ask:

  • What is the manager’s approach to ESG? Do they rely on outside data providers or also perform their own fundamental research on ESG practices?
  • What’s the manager’s process for integrating ESG considerations into the funds you are assessing? There’s no one correct answer to this question, but the manager should be able to explain in a granular way how ESG fits into the investment process and how it adds value.
  • Is the manager a signatory to Principles for Responsible Investment? If so, are they maintaining a high score?
  • Does the manager actively engage with issuers on material ESG issues? They should report on engagement activity at a granular level to show the effectiveness of their program in a way that allows you to evaluate trends.

What the above questions illustrate is that effective ESG integration is more than just looking at the ESG scores. The value is realized when an advisor incorporates the external research into their own ESG analysis and engagement. By taking that research and using it to gain a better understanding of how a company is managing, or not managing, ESG-related risks, it allows the advisor to build a more complete picture of overall risk.

New tools are emerging, their development being driven by the growing demand for ESG data. One such provider, TruValue Labs, uses artificial intelligence to gather and organize data from non-company sources and then screens out the noise using Sustainability Accounting Standards Board materiality standards. The result is an independent real-time measure of ESG performance that complements the backward-looking ESG research generated by the largest providers today.

Any outside data source is still additive to your own research, and the hard work by your portfolio managers. The inconsistencies with company report ESG data means there is no substitute in-house ESG analysis and for sitting down with boards and corporate managers and asking tough questions — the same tough questions any good fundamental analyst asks to get a true picture of a company’s worth.


Catherine BanatCatherine Banat is director of US Responsible Investing for RBC Global Asset Management. RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes the following affiliates around the world, all indirect wholly owned subsidiaries of RBC: RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Ltd., BlueBay Asset Management LLP, BlueBay Asset Management USA LLC and the investment management division of RBC Investment Management (Asia) Ltd.