European Small Cap Equity
We’re regularly baffled by the ESG scores for companies we know are committed to a sustainable future
We are often vocal about the shortcomings of ESG ratings. This frustration is particularly acute for our European Small Cap Equity team who invest in companies that often do not have any coverage from ESG agencies. For those that are rated, the grades rarely reflect what we understand of the company through our bottom-up analysis and regular company interaction. We’re regularly baffled by the ESG scores for companies we know are committed to a sustainable future.
A judge in Germany has ruled that a rating agency cannot deem a company to be poor or underperforming on an ESG issue simply because the company does not disclose the specific data it requested
So, we were pleased to see last week, lost in the heavy Coronavirus news-cycle, that there was a positive development for small cap investors on this topic. A judge in Germany has ruled that a rating agency cannot deem a company to be poor or underperforming on an ESG issue simply because the company does not disclose the specific data it requested. German tech company Isra Vision, a company we know well and in which we have invested in the past, took ESG rating agency ISS ESG to court over this issue, claiming that their ESG ranking was docked because they don’t disclosure data that is non-material for their business – in this instance KPIs such as wastewater management for a company that sells software.
This highlights two important issues – firstly that ESG scores are clearly biased to large companies that have the resources to report an extensive amount of ESG data that is often not material, and secondly that ESG ratings , while helpful, can be opaque in their formation and therefore should be used only as an input for investment decisions.
We have built our own ESG team who do bottom-up ESG analysis on the companies in which we invest
This is why we have built our own ESG team who, working with the fund analysts and managers, do bottom-up ESG analysis on the companies in which we invest. Through this process we are able to build a stronger understanding of the ESG profile of companies, taking into account what they do, what their strategy is and how well they’re managing ESG risks and opportunities, than any ESG agency.
The level of disclosure remains important: we look to influence the companies to disclose more information
The level of disclosure remains important; if companies don’t share information on key ESG factors, it’s very difficult for us to evaluate the company and monitor its progress towards ESG goals. For this reason, we look to influence the companies to disclose more information. This includes our significant involvement in the CDP Disclosure campaign, encouraging companies to disclose information on their climate strategy and report their emissions.
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