Cécile Bic­cari
(née Churet)

is Man­ag­ing Part­ner at Con­trast Cap­i­tal where she advis­es clients on sus­tain­abil­i­ty invest­ing and strate­gic ESG com­mu­ni­ca­tion. Her exper­tise lever­ages 15 years of work in this field (Robe­coSAM, HSBC, WBCSD)

cap­i­tal mar­kets

Looking inside the investment BLACK BOX

By Cécile Bic­cari / Illus­tra­tion: Anne Lück

Main­stream investors are becom­ing more sophis­ti­cat­ed in the way they inte­grate envi­ron­men­tal, social and ­gov­er­nance (ESG) infor­ma­tion in their invest­ment ­process. But they are often fail­ing to explain to com­pa­nies what ­infor­ma­tion mat­ters most to them, how it ­relates to their broad­er finan­cial analy­sis and how it ­impacts ­invest­ment deci­sions. Here are some insights.

A grow­ing num­ber of main­stream investors are com­mit­ting to “ESG inte­gra­tion”. In prac­ti­cal terms, this means they seek to enhance their invest­ment deci­sions by sys­tem­at­i­cal­ly incor­po­rat­ing mate­r­i­al ESG issues into fun­da­men­tal analy­sis and val­u­a­tion mod­els. Why? Because this infor­ma­tion enables them to gain a more com­plete under­stand­ing of a firm’s com­pet­i­tive posi­tion­ing and its abil­i­ty to main­tain its com­pet­i­tive edge over time.

Mate­ri­al­i­ty is in the eyes of the behold­er

The con­cept of “finan­cial mate­ri­al­i­ty” is an impor­tant start­ing point as it aims to iden­ti­fy issues with the great­est poten­tial impact on the company’s long-term com­pet­i­tive­ness and pri­ori­tise these issues when com­mu­ni­cat­ing with investors. Sec­tor guide­lines exist, but it is the respon­si­bil­i­ty of the man­age­ment teams to ­deter­mine what issues are most rel­e­vant to their firm giv­en the company’s busi­ness mod­el, its cur­rent oper­a­tions and cor­po­rate strat­e­gy. They must retain own­er­ship of this process because every firm is unique and investors will con­tin­ue to have dif­fer­ent views on what ESG infor­ma­tion they con­sid­er most mate­r­i­al, just like they pay vary­ing atten­tion to dif­fer­ent aspects of the exe­cu­tion of the busi­ness strat­e­gy and quar­ter­ly results announce­ments. Whilst “mate­ri­al­i­ty analy­sis” and “stake­hold­er engage­ment” exer­cis­es can be infor­ma­tive, man­age­ment teams should try to embed this analy­sis in their estab­lished long-term plan­ning, risk fac­tors and cap­i­tal allo­ca­tion dis­cus­sions.

Whilst ‘mate­ri­al­i­ty analy­sis’ and ‘stake­hold­er engage­ment’ exer­cis­es can be infor­ma­tive, man­age­ment teams should try to embed this analy­sis in their estab­lished long-term plan­ning, risk fac­tors and cap­i­tal allo­ca­tion dis­cus­sions.

Action­able, for­ward-look­ing infor­ma­tion required

Once a com­pa­ny has iden­ti­fied the most mate­r­i­al issues for its busi­ness, it needs to pack­age this infor­ma­tion in such a way that it will reach its ulti­mate tar­get audi­ence, i.e. the ana­lysts and port­fo­lio man­agers mak­ing invest­ment deci­sions, and prefer­ably those who take a long-term ori­en­ta­tion in man­ag­ing assets. This group expects action­able infor­ma­tion, typ­i­cal­ly:


a strong nar­ra­tive (usu­al­ly found in the “man­age­ment dis­cus­sion” sec­tion of an annu­al report) that qual­i­ta­tive­ly out­lines the most com­pelling macro trends impact­ing the indus­try, how these cre­ate risks or oppor­tu­ni­ties for long-term val­ue cre­ation, and how the com­pa­ny is posi­tioned to cap­ture these oppor­tu­ni­ties and man­age these risks. This should be con­tex­tu­alised with­in the broad­er cor­po­rate strat­e­gy and man­age­ment should make clear links to future rev­enue streams or poten­tial cost-sav­ings wher­ev­er pos­si­ble. 


a lim­it­ed num­ber of data points and KPIs about the company’s past per­for­mance, as well as its strate­gic invest­ment in key areas (e.g. Capex fig­ures). Where pos­si­ble, it should also indi­cate expect­ed return on these invest­ments, both in terms of reach­ing pre-defined ESG tar­gets but also with regard to poten­tial impacts on future costs and rev­enues, and how this is reflect­ed in man­age­ment fore­casts.

Com­par­a­tive analy­sis mat­ters …

Armed with this infor­ma­tion, investors will look for evi­dence of align­ment with­in the firm (e.g. are the strate­gic pri­or­i­ties iden­ti­fied at group lev­el sup­port­ed by appro­pri­ate resources and ­incen­tives with­in busi­ness units?), of scale (e.g. is this done through­out the busi­ness?) and of a pos­i­tive trend (e.g. has the per­for­mance improved over time?). This analy­sis will enable investors to strength­en their over­all opin­ion of the company’s finan­cial per­for­mance, the qual­i­ty of their man­age­ment team and the robust­ness of its cor­po­rate strat­e­gy. Investors will typ­i­cal­ly also use this data in com­par­a­tive analy­sis, bench­mark­ing com­pa­nies’ prac­tices and per­for­mance against a small peer group or broad­er indus­try ­aver­ages, to deter­mine whether they are like­ly to be at a com­pet­i­tive advan­tage in the way they man­age spe­cif­ic ESG risks and oppor­tu­ni­ties. Where pos­si­ble, they will also use quan­ti­fied data as input into their val­u­a­tion mod­els, adjust­ing rev­enues expec­ta­tions, costs or Capex needs; and reflect­ing their opin­ion of the over­all risk pro­file of the firm on the dis­count rate being used to cal­cu­late the company’s fair val­ue.

… but inte­grat­ed analy­sis is not yet the norm

Ulti­mate­ly, this should enable investors to con­struct a bet­ter-­in­formed invest­ment the­sis and to unveil some issues of con­cern about the company’s abil­i­ty to cre­ate sus­tain­able val­ue, which they can then dis­cuss with man­age­ment teams. But because ­investors have been slow to imple­ment this type of inte­grat­ed analy­sis, com­pa­nies should also proac­tive­ly iden­ti­fy those who are already sys­tem­at­i­cal­ly apply­ing this approach and pri­ori­tise them in their out­reach efforts. By engag­ing with them, com­pa­nies can pro­gres­sive­ly build a core group of share­hold­ers who are like­ly to invest for the long-term.