Fulfilling investors’ fiduciary duty requires a holistic risk assessment of companies that can no longer overlook extra-financial information. If undertaken correctly using a pragmatic ESG approach based on materiality, integrating ESG can lead to additional value. In this presentation, CPR Asset Management will give an overview of its differentiating methodology that combines standard overall ESG ratings with more granular ESG information: the so-called “weak signals”.

The latest MSCI study Foundations of ESG Investing examines how ESG is correlated to the valuation and performance of companies, both through their systematic profile – lower cost of capital and higher valuations – and their idiosyncratic risk profile – higher profitability and lower exposure to tail risk. Investors may still question whether ESG ratings can provide additional differentiation and insights within a universe of high quality stocks. MCSI’s study found that companies with strong MSCI ESG Ratings exhibited higher returns and valuation even among the strongest performing companies. Most of this outperformance was driven by management of social, environmental risks and opportunities, as there was relatively little variation in governance scores. In relation to emerging markets, companies tend to have lower ESG ratings than global peers. But by actively tilting to higher ESG rated companies, it added value, with companies in the MSCI ESG EM index demonstrating lower risk and higher returns since inception. Excluding companies with poor ESG ratings from the index helped to avoid significant downside events, but contribution to performance also came from overweighting better ESG quality companies. This presentation considers these and other discussion points about the foundations of ESG investing.