ESG factors a marker of earnings potential

ESG factors a marker of earnings potential

Investors that consider both valuations and environmental, social and governance (ESG) factors are more likely to identify companies that will outperform over the long term, says UBS Asset Management.


UBS Asset Management managing director and head of sustainable investors, Bruno Bertocci, said investors who consider both valuations and sustainability dimensions will more likely achieve both value and strong performance.

Speaking in Sydney yesterday, Mr Bertocci said: “If you’re only looking at the financial data that a company is releasing you don’t have a complete picture.”

He said by considering ESG metrics, investors can look at a specific company with a “wider lens” and “broader set of considerations”. This provides a clearer notion of the company and if the company is likely to succeed over the long run. 

Mr Bertocci added that companies today, like Google for example, are structured differently from the past and have no real physical assets. This in itself requires a different analytical approach. 

"In many cases its the brainpower of the employees and the intellectual property they generate that will make the company successful and that's not going to come out in the financial data.

"Looking at the financial data alone simply tells you less about the company because the nature of these companies has all changed," he said. 

In addition, Mr Bertocci said investors can gain a real advantage as the state of sustainability data is “messy” – “You have to work at it to gather it or use it.”

“If you’re willing to do it you basically have an informational advantage,” he said.

UBS Asset Management's director and equity specialist for sustainable investors, Dinah Koehler, said sustainable investing has moved away from an “exclusionary” approach. 

“We are looking at all stocks, [but] we choose to select those that perform highly… on sustainability dimensions and are most attractively valued,” she said.

Mr Bertocci said the practice is not a separate asset class. He argued that as more investors employ ESG metrics, it will become commonplace. 

"I think it will take a while to get there but I kind of think that's where we're going to end up."

Ms Koehler added that the Australian market is considerably sophisticated when it comes to sustainable investing. 

"For those [super funds] who are already involved in sustainability, the conversation is much more developed I think than what we've had with pension funds in the United States."

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