ESG Integration™: Foresight and Action
ESG Integration™ requires foresight and action which forms the basis of Responsible Alpha's business ethic and guides our research and analysis.
Our proven track record has highlighted material ESG risks and opportunities to investors, corporations, and NGOs supporting capital preservation, enhancing risk-adjusted rates of return while improving environmental, social, and governance outcomes.
- We advised a large bank on its ESG policy that supported the bank in mitigating reputational risks its peers faced with an inferior policy.
- We informed an asset manager to exit a multimillion dollar position in a flooring company before its shares collapsed because it was importing illegally sourced timber.
- We privately informed the C-Suite of a large corporation whose key supplier was violating national laws while it was engaged in illegal deforestation saving the firm from reputational risk.
- We informed the CFO of a large energy trader whose financial accounting statements were erroneous due to both climate risk and financial accounting errors, resulting in a multimillion dollar write-down.
Our decades of experience in working at the junction of finance, society, governance, and the environment adds texture to the framework necessary to produce replicable, scalable, verifiable, and actionable solutions to complex problems.
Core to our mission is our public statement on our corporate charter – to advise investors and market participants on their transition paths to a low-carbon, sustainable and equitable future.
ESG Integration™: Data and Securities Universe
ESG Integration™ is how Responsible Alpha supports companies and investors to begin their transition to a low-carbon, sustainable, and equitable future by 2025.
ESG is a set of standards, metrics, and criteria used to assess the environmental, social, and governance performance of companies, securities, assets (facilities), and supply chains.
ESG data is summarized into criteria that informs stakeholders actions and approaches to engagement and financial institutions' lending, underwriting, and investment practices. The term ESG was first coined in 2005 in a landmark study entitled Who Cares Wins supported by the UN Global Compact, ABN AMRO, Goldman Sachs, Westpac, and others.
The latest biennial review by the Global Sustainable Investment Alliance (GSIA) in 2020 reported $35.3 trillion in global assets under management employing an ESG lens.
Responsible Alpha in its ESG Integration™ process uses ESG and financial data from government, NGO, and industry data aggregators to assess 6,000 publicly traded companies, and their facilities and supply chains - when data is available, to assess their risk-adjusted rates of return and their ESG factors.
ESG Integration™: Benefits
Responsible Alpha’s ESG Integration™ process benefits civil society, companies, and investors for the following reasons:
- Forecasting pathways for transition to a low-carbon, sustainable, and equitable future.
- Addressing climate risks – physical and transition risks – and opportunities – within a time-bound stress tested model.
- Enhancing identification of opportunities, turning risks into opportunities.
- Decreasing capital costs.
- Growing risk-adjusted returns.
- Assessing industry shifts to determine investment risks and opportunities.
- Improving operational efficiency.
- Responsiveness to investor and customer sentiment.
- Mitigating regulatory risks.
- Strategically aligning capital and business operations within planetary boundaries.
ESG Integration™: ESG Factors
Alongside programs and frameworks such as the EU Taxonomy, the UN Sustainable Development Goals, the Task Force on Climate-Related Financial Disclosures, the U.S. SEC climate disclosure rules, and many others, Responsible Alpha's ESG Integration™ employs processes that assess ESG and financial factors that are directly and indirectly measured and that can be shown to impact company, security, asset, and supply chain financial statements. Some ESG factors are applicable across all three ESG categories as listed below – thus, a siloed approach to ESG management will be ineffective. Some ESG factors are listed below.
- Climate change and carbon emissions including climate risk and both physical and transition risks, and adaptation and mitigation.
- Air and water pollution including impact of nutrients, chemicals, aerosols, and ozone depleting substances.
- Biodiversity integrity and loss.
- Deforestation and change in land-use and agriculture patterns.
- Energy efficiency.
- Waste management.
- Water scarcity, quality, and quantity
- Ocean acidification.
- Changes in biogeochemical flows such as nitrogen and phosphorus.
- Human rights.
- Product safety.
- Labor standards.
- Data protection and privacy.
- Discrimination prevention.
- Employee engagement.
- Customer satisfaction.
- Community relations.
- Supply chain risks.
- Land tenure and property rights.
- Free prior and informed consent.
- Board composition, governance, and independence.
- Fiduciary duty including audit committee independence and financial accounting rigor.
- Bribery, corruption, conflicts of interest, and whistleblower schemes.
- Executive compensation.
- Lobbying and political contributions.
- Supply chain governance.
- Asset level governance.
It is important to note that not all ESG determinations are conclusive as ESG Integration™ is a process that can often yet not always be reflected in improved risk-adjusted rates of return and timely risk mitigation.
ESG Integration™ is of particular importance to institutions that want to begin their wholistic transition to a low-carbon, sustainable, and equitable future.
ESG is also different from sustainability and corporate social responsibility.
Sustainability is how society meets its needs without overburdening the environment or weakening society. History of recent sustainability movements began in the 1970s when the book The Limits to Growth was commissioned by the Club of Rome. The World Commission on Environment and Development: Our Common Future (also called the Brundtland Report) by the UN in 1987 defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.
Corporate Social Responsibility (CSR) is when corporations engage in activities that benefit society without direct connection to their goods or services, and then communicate about these activities. CSR grew in the 1990s when corporations began developing environmental and social activities not related to their core businesses funded by staff volunteer hours and goods and services donated by the company.
ESG Integration™: Process
Responsible Alpha’s ESG Integration™ process is the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions related to investments in companies, securities, assets, and supply chains. ESG Integration™ is the process to measure, manage, and monitor financially material ESG factors in investment decision-making.
An example of ESG Integration™ process includes:
- Stage One - Analysis: Assessing and identifying all relevant financial and ESG information. By integrating public and private data sources within a rigorous analytical framework, Responsible Alpha’s ESG Integration™ identifies material factors over an historic economic cycle.
- Stage Two – Framing: Responsible Alpha’s ESG Integration™ process employs a discrete time horizon specific to the industry’s economic cycle, the product life cycle, the timeliness and consistency of the data, the maturity of the security, and the time horizon and strategy of the investment decision. Strategies assessed can include active and passive management – such as exchange-traded funds (ETFs), value and growth strategies, thematic strategies such as climate transition and green bonds – such as climate and sustainability bonds, supply chain risks and opportunities, and numerous other criteria.
- Stage Three – Risk Analysis: Conducting industry standard scenario analysis of material issues within a risk and return lens. This includes repricing ESG Integration™ risks and opportunities for companies, securities, assets, and supply chains.
- Stage Four – Forecasting: Responsible Alpha’s ESG Integration™ risk on a quarterly basis in the short-term – until 2025, mid-term – 2025 to 2035, and long-term – 2035 to 2050.
- Stage Five – Impact and Engagement: Incorporating historical material ESG impacts and current forecasts, via forensic accounting, reperformance, and remeasurement, into categories of financial ratios including:
- Liquidity ratios: current and quick ratios.
- Turnover ratios: accounts receivable and payable ratios.
- Leverage ratios: debt to equity and interest coverage ratios.
- Performance ratios: EBITDA, return on equity (ROE), and profit margin ratios.
- Valuation ratios: price to earnings (P/E) and price to book (P/B) ratios.
- Stage Six – Sharing Best Practices: Responsible Alpha’s ESG Integration™ process includes working with industry and stakeholder coalitions to develop scalable and functional best practices to support the global transition to a low-carbon, sustainable, and equitable future by 2025.
ESG Integration™: Risk Analysis Process
Responsible Alpha's ESG Integration™ risk analysis process incorporates the following risks, starting from short-term to long-term impacts:
- Operational Risk.
- Reputational Risk.
- Liquidity Risk.
- Credit Risk.
- Market Risk.
- Legal / Regulatory Risk.
- Business Risk.
- Strategic Risk.
ESG Integration™: Double Materiality and Validity
Responsible Alpha's ESG Integration™ to double materiality analysis focuses on time-bound and valid transition risks and opportunities that face companies and investors if they are going to start their transition to a low-carbon, sustainable, and equitable future by 2025.
Based on a strong understanding of the underlying scientific principles, data, and reporting, Responsible Alpha’s ESG integration™ involves integrating only the material financial and ESG issues that are considered likely (66% to 100%), very likely (90% to 100%), and extremely likely (95% to 100%) certain to affect corporate performance and investment performance in the short-term – until 2025, mid-term – 2025 to 2035, and long-term – 2035 to 2050.
ESG Integration™: Timely, Consistent, and Actionable
With the purpose of advising institutions on beginning their transition paths to a low-carbon, sustainable and equitable future by 2025, Responsible Alpha’s ESG Integration™ research and analysis of its universe of 6,000 publicly traded companies, and where available, their equity and fixed income securities, their assets, and their supply chains is conducted quarterly in a transparent and replicable manner informed by the accounting principles of verifiability and conservatism.
Responsible Alpha's research is distributed via various media channels and directly with partners and institutions - supports changemakers, whomever they are, wherever they may be, who are beginning their pathways on a transition to a low-carbon, sustainable, and equitable future.