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ESG Factors Can Illuminate Due Diligence Processes

In addition to their own interest in boosting investment performance, investor demand is another top reason why investment managers are taking ESG issues into consideration, Cerulli finds.

By John Manganaro editors@plansponsor.com | July 19, 2016
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There is an increasing amount of evidence to show environmental, social, and governance (ESG) practices of publically traded companies correlate directly with other astute business procedures—supporting positive financial performance.

According to Cerulli’s third quarter 2016 issue of The Cerulli Edge – U.S. Institutional Edition, a growing percentage of asset managers proactively consider ESG factors in conjunction with traditional financial analysis to identify risks and opportunity when investing in companies and evaluating their business practices.

Although many asset management firms have adopted ESG principles, “determining how to implement them remains a work in progress," warns Michele Giuditta, associate director at Cerulli. “More than half of consultants polled by Cerulli have dedicated resources for ESG manager research, and others are considering adding resources. Cerulli urges asset managers who are not taking ESG criteria into consideration to re-evaluate this decision.”

In addition to their own interest in boosting investment performance, investor demand is another top reason why investment managers are taking ESG issues into consideration, Cerulli finds.

“Investors no longer limit review of their assets to metrics such as revenue, profitability, or valuation,” the report explains. “Strong ESG can correlate with astute business practices and positive financial performance. The financial crisis of 2008 and several cases of management misconduct have prompted institutional investors to conduct deeper operational due diligence before allocating to hedge funds, for example.”

According to Cerulli, some of the ESG considerations that U.S. institutional investors increasingly consider include “political contributions, executive compensation, air and water pollution, deforestation, labor standards, human rights, and many others.” The vast majority (88%) of asset managers integrate at least some of these “ESG risks and opportunities” into their general financial analysis. “However, they vary in how comprehensively they conduct their research,” Cerulli warns.

NEXT: What sound ESG practices look like 

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