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Introducing ESG into Investment Research
Environmental, Social and Governance (ESG) Highlights.
Waqar Syed, MBA
ATB Research has taken a major initiative to incorporate environmental, social, and governance (ESG) criteria into its investment process. As a start, we have introduced ESG research in the Energy Infrastructure and Energy Services sectors. In the full report, we highlight the following key points:
- the materiality of ESG disclosures for corporates,
- the rationale for incorporating ESG research into investment frameworks,
- ATB’s choice of using Sustainability Accounting Standards Board (SASB) standards as a basis of its ESG research,
- an explanation of the ATBesg framework, and
- a brief discussion of our conclusions from the Energy Infrastructure and Energy Services sector ESG reports.
A Trip Down Memory Lane
The market crisis of 1929 led to the creation of the Securities and Exchange Commission (SEC) in 1934 and disclosure of material decision-useful information became the bedrock for the creation of efficient markets. The definition of what is material has evolved as the market moved from historical cost accounting to incorporating forward-looking information to value companies. Given government, public, and investor scrutiny of ESG issues, and rising carbon prices around the world, incorporating ESG into the investment framework has now become a fiduciary duty of most major institutional investors. Disclosure of such information is now incumbent on corporate managements to not only attract new capital, but for many, it may already be a legal requirement.
Why We Chose SASB as a Basis for ESG Research
ATB Research is using SASB standards as the basis for its ESG research, although many other formats/ frameworks are available as well. Our rationale is as follows:
- SASB approaches materiality in the context of enterprise value creation;
- SASB standards are industry-specific, allowing comparisons across companies in an industry;
- SASB uses a rigorous framework for defining industry-specific criteria; and
- SASB standards are most widely used by our coverage and several major institutional investment firms have also spoken in favour of SASB standards. Having said that, at COP26, steps were taken to unify the various reporting organizations, with SASB remaining in the mix, and likely becoming the backbone as far as industry-specific disclosure criteria are concerned.
What is ATBesg?
While ATB built its ESG analysis on SASB standards, we also found that corporate disclosures on SASB criteria were not complete, and SASB “E” and “S” criteria alone didn’t give a fair picture. Moreover, SASB’s governance criteria were too industry-specific and didn’t reflect the investor interest in evaluating governance structure and policies holistically. As a result, we developed our governance checklist based on recommendations of the CFA Institute and the International Corporate Governance Network (ICGN). Therefore, our ESG analysis is called ATBesg.
Energy Infrastructure ATBesg Highlights
The sector has several attractive-return, low-carbon emission initiatives in progress. ATBesg ranks the sector on Best-In-Class (BiC) and Best-in-Momentum (BiM).
Energy Services ATBesg Highlights
SASB disclosures within the Energy Services industry are weak and we made several adjustments to create the ATBesg framework.
Waqar Syed, MBA 720-683-6705
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