As the number of institutional investors focused on impact investing continues to grow, so has the demand for data to help them measure the environmental, social and governance impacts of the companies they invest in.
The overall availability and quality of ESG data has grown in recent years, but so has the number of companies ‘green washing’ their businesses so that they appear more ESG friendly than they are. That makes the job of analyzing data an even heavier lift.
For nearly a decade, DWS Group has used its ESG Engine to help investors with that task. While it began with relatively few data points, the proprietary software system has incorporated more data as it has become available. Now it analyzes more than a billion data points to evaluate over 10,000 companies whose grades range from ESG True Leader (grade A) to ESG True Laggard (grade F).
“Taking ESG factors into consideration can be hard for investors because you have to deal with so much data, industry trends and analysis,” said Roelfien Kuijpers, head of responsible investments for DWS. “You have to look at the long-term trends of the industry and the company, and then you have to analyze the dimensions around the E, the S and the G.”
The DWS ESG Engine not only gives a company an overall grade, but it also can drill down to analyze specific criteria, such as the impacts on and effects of climate change or the presence of women on the company’s board. In addition, the ESG Engine provides analysis on whether companies are improving or deteriorating their ESG profiles.
“Let’s say a company has a “D” rating,” Kuijpers said. “We work with the investee company’s management through our corporate engagement practice and will focus on those ESG issues that are important to us and our clients. At some point we may predict that their grade improves as the investee company becomes more proactive in dealing with these issues. So that may give us insight to make an investment decision based on the overall improvement of the company’s ESG score.”
Conversely, when DWS analysts see a company with a strong ESG Engine grade that starts to deteriorate, they look for other red flags that might indicate material concerns. That’s helpful for clients who are looking to ESG investing not only as an ethical endeavor, but also as a means of risk mitigation.
“We saw an example of this last fall. The ESG Engine raised red flags about an investee company, resulting in our portfolio managers selling our investment, which was fortuitous given that the company declared bankruptcy a few months later,” Kuijpers said. “ESG data is critical to the investment process, resulting in better-informed investment decisions.”
