AMWatch

ESG analysis requires a holistic approach, argues Schroders Director in Finland

Many companies look good when screening only their immediate impact, but analyzing in detail how their products are made, or how they are governed can significantly change their ESG ratings, says Schroders Helsinki-based Client Director.

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When screening companies for ESG criteria, investors tend to focus on the immediate impact of a company's operations. Attention, however, should also be on the secondary effects of the company's operations, says Schroders Client Director Roope Relander from the company’s new Helsinki office.

"Company screenings sometimes focus only on the first-degree impact of the company and does not include the second-degree impact of its operations," Relander says, adding: "The supply chain is a good example, accounting for 90 percent of a company's carbon footprint in some industries."

"For example, a solar panel company may manufacture energy efficient and so-called green products, but what if these products are made using child labor? Another potential example is electric cars, which may consume a lot of energy during the manufacturing process, so that they become sustainable only after driving a certain distance, which is much longer than many would think," Relander continues.

Many companies may look good when screening only their immediate impact, but analyzing in detail how their products are made, how they are governed, or other factors may significantly change their ESG ratings, Relander notes.

In his opinion, ESG analysis requires a more holistic approach. "Companies should go through an impact analysis, which takes into account their supply chain and the whole life cycle of their product."

Responsibility and sustainability gaining ground in emerging markets

Meeting ESG standards is also increasingly important in emerging markets, where the topic of sustainability often meets more challenges than it does in developed markets.

Naturally, sustainability development is a more arduous task in emerging markets, Relander notes. "But responsibility and sustainability, which have played an increasingly central role in investment decisions in Europe and North America for several years already, are gradually becoming part of investing in emerging markets as well," Relander says.

Medium and long-term opportunities are still generally vast in emerging markets, Relander says. For instance, the continuous opening-up of China is a major opportunity for investors and India, too, presents a huge future growth potential. "Emerging markets remain attractive despite all the challenges in today’s financial markets. We should keep in mind that the UN projects India's population to exceed that of China in just eight years and that obviously creates attractive investment opportunities as well as opportunities to make a real impact on sustainability in these countries," Relander adds.

In June, Schroders managed assets totaling EUR 497bn of which most on behalf of institutional investors.

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