{"id":2615,"date":"2024-08-15T06:37:21","date_gmt":"2024-08-15T06:37:21","guid":{"rendered":"https:\/\/bridgewise.com\/?p=2615"},"modified":"2024-08-15T06:37:21","modified_gmt":"2024-08-15T06:37:21","slug":"the-abcs-of-esg-analysis","status":"publish","type":"post","link":"https:\/\/bridgewise.com\/blog\/the-abcs-of-esg-analysis\/","title":{"rendered":"The ABCs of ESG Analysis"},"content":{"rendered":"<p><span style=\"font-weight: 400\">ESG analysis is critical to helping investors find sustainable companies. As we witness sustainability in business become increasingly more valuable to investors, it\u2019s equally important to understand <\/span><i><span style=\"font-weight: 400\">how <\/span><\/i><span style=\"font-weight: 400\">to evaluate the ESG status of a company. Fortunately, there is an established set of tools that makes it easier to examine these organizations and translate recommendations into actionable moves for investors.<\/span><\/p>\n<h2><b>A Quick Introduction to Sustainability\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400\">A sustainable business is one that has a strategy to minimize its negative environmental and social effects. The trending investor interest in such companies is part of an overall increase in awareness connected to \u201c<\/span><a href=\"https:\/\/www.icgn.org\/global-stewardship-principles\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">Global Stewardship<\/span><\/a><span style=\"font-weight: 400\">\u201d. As an added perk, firms like <\/span><a href=\"https:\/\/www.mckinsey.com\/capabilities\/strategy-and-corporate-finance\/our-insights\/the-triple-play-growth-profit-and-sustainability\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">McKinsey<\/span><\/a><span style=\"font-weight: 400\"> state that sustainable companies make good investments.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">This sector has seen impressive growth over the past few years. Stock exchanges the world over have indexes of these companies, while <\/span><a href=\"https:\/\/www.bloomberg.com\/company\/press\/global-esg-assets-predicted-to-hit-40-trillion-by-2030-despite-challenging-environment-forecasts-bloomberg-intelligence\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">Bloomberg<\/span><\/a><span style=\"font-weight: 400\"> projects that their global assets will reach a value of $40 billion by 2030.\u00a0\u00a0<\/span><\/p>\n<h2><b>The 3 Components of ESG<\/b><\/h2>\n<p><span style=\"font-weight: 400\">To analyze these equities, three \u201cpillars\u201d have been established as a way to delineate and describe the behavior of sustainable companies:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><i><span style=\"font-weight: 400\">Environmental<\/span><\/i><span style=\"font-weight: 400\">: This includes energy use types and levels, carbon emissions, climate change and resource depletion effects, pollution levels, choice of waste disposal type<\/span><\/li>\n<li style=\"font-weight: 400\"><i><span style=\"font-weight: 400\">Social<\/span><\/i><span style=\"font-weight: 400\">: This includes promotion of people and culture, supply chain origin, discrimination, political contributions, DEI, human rights, community relations<\/span><\/li>\n<li style=\"font-weight: 400\"><i><span style=\"font-weight: 400\">Governance<\/span><\/i><span style=\"font-weight: 400\">: This includes accountability, ethical behavior, actions against corruption, executive compensation, shareholder rights, how boards are elected and staffed<\/span><\/li>\n<\/ul>\n<h2><b>The Challenge of Sustainable Investments<\/b><\/h2>\n<p><span style=\"font-weight: 400\">Despite its rapidly growing popularity, the ESG investment market can be confusing for institutions and investors. As an officially recognized concept, ESG has only been around <\/span><a href=\"https:\/\/www.thecorporategovernanceinstitute.com\/insights\/lexicon\/what-is-the-history-of-esg\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">since 2004<\/span><\/a><span style=\"font-weight: 400\">. You might even be hard pressed to find a <\/span><a href=\"https:\/\/www.axa-im.com\/what-we-do\/select-investments\/esg-investing-global-investor-survey\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">retail investor who has heard the term<\/span><\/a><span style=\"font-weight: 400\">; only 26% of European and 47% of Asian retail investors know about it.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">This reflects the information gap between institutions and their investor clients. Easy access to ESG equities is limited by the general fact that <\/span><a href=\"https:\/\/www.visualcapitalist.com\/largest-stock-exchanges-in-the-world\/#google_vignette\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">almost half of global stock values<\/span><\/a><span style=\"font-weight: 400\"> are accounted for by only <\/span><a href=\"https:\/\/www.statista.com\/statistics\/270126\/largest-stock-exchange-operators-by-market-capitalization-of-listed-companies\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">two exchanges<\/span><\/a><span style=\"font-weight: 400\">, both of which are in the US. In other words, the vast majority of ESG-focused companies are not on the exchanges that are normally looked at, or covered by most analysts. To complicate matters, lesser-known investments produce statements in languages other than English.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Another consequence of ESG\u2019s newness is that its reporting standards are not exactly that. A lack of consistency across companies and industries means that comparing investments becomes more difficult. This is true not only between individual companies, but across regions as well, because different ESG metrics are used in the US, EU, APAC, and so on.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">And so, whereas traditional public financial statements are subject to GAAP and IFRS, ESG reports might be composed using numerous frameworks. In fact, according to the <\/span><a href=\"https:\/\/www.ifac.org\/news-events\/2024-02\/sustainability-reporting-and-assurance-practices-largest-global-companies-continue-mature-ifac-aicpa\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">International Federation of Accountants<\/span><\/a><span style=\"font-weight: 400\">, 87% of companies use a mix of ESG standards for reporting. These include:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Sustainability Accounting Standards Board (SASB) Standards\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Task Force on Climate-related Financial Disclosures (TCFD) Framework\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Global Reporting Initiative (GRI)<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Corporate Sustainability Reporting Directive\u00a0(CSRD)<\/span><\/li>\n<\/ul>\n<h2><b>Delving into ESG Equity Factor Analysis<\/b><\/h2>\n<p><span style=\"font-weight: 400\">Let\u2019s expand on the three categories of ESG to get a sense of what data is included where:<\/span><\/p>\n<p><strong>Environment<\/strong><\/p>\n<p><span style=\"font-weight: 400\">This covers the effects that the company has on the environment. It looks at the resources that a company uses in its operations and how this affects not only the local environment but conditions across the world. This makes sense, for example, when considering that a manufacturer receives parts from overseas that require fuel-burning ships to deliver.<\/span><\/p>\n<p><strong>Social<\/strong><\/p>\n<p><span style=\"font-weight: 400\">Social factors examine the relationships between the organization and its stakeholders, including business partners, suppliers, customers, and the local community. Social analysis might also look at employee relations and participation in human rights issues.<\/span><\/p>\n<p><strong>Governance<\/strong><\/p>\n<p><span style=\"font-weight: 400\">Governance covers the internal policies and processes used to promote ethics, compliance, and security. An ESG report tends to examine areas such as cybersecurity measures, data privacy, adherence to tax laws, and the way in which board members are chosen.\u00a0<\/span><\/p>\n<h2><b>Making Sense of ESG with Artificial Intelligence<\/b><\/h2>\n<p><span style=\"font-weight: 400\">Sounds a bit messy? It can be, but innovative financial companies have developed AI-based solutions that make ESG analysis more accessible and easier to understand. Part of this is powered by machine learning algorithms to process massive amounts of financial statement data, regardless of language or ESG framework. Because a fundamental aspect of stock performance is ratio analysis, AI reviews years (and even decades) of information in order to reveal trends. All of this analysis is then processed by generative AI into text, numerical, and graphical formats that can be understood easily and used to make recommendations. The result is:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Elimination of data clutter due to multiple reporting formats<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">A standard report layout that boosts comprehension and ease of use<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Analysis over time to gauge ESG improvements<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Numerical scores that are essential for cross-company and cross-industry comparables<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">Discover how ESG investing can happen for your institution today. <\/span><a href=\"https:\/\/bridgewise.com\/request-a-demo\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400\">Get in touch with us to find out how<\/span><\/a><span style=\"font-weight: 400\">!<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is ESG analysis and how is it changing the way investors find opportunities.<\/p>\n","protected":false},"author":8,"featured_media":2618,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","inline_featured_image":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[13,27],"tags":[38,37,39],"class_list":["post-2615","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","category-insights-and-trends","tag-ai-in-finance","tag-esg-analysis","tag-sustainability"],"acf":[],"_links":{"self":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts\/2615","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/comments?post=2615"}],"version-history":[{"count":4,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts\/2615\/revisions"}],"predecessor-version":[{"id":2620,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts\/2615\/revisions\/2620"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/media\/2618"}],"wp:attachment":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/media?parent=2615"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/categories?post=2615"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/tags?post=2615"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}