RobecoSAM’s research focuses on the link between sustainability and financial materiality. But what is financial materiality, exactly? Jacob Messina, Head of Sustainability Investing Research explains how RobecoSAM determines the financial relevance of the sustainability criteria that are incorporated into the Corporate Sustainability Assessment.
We consider any intangible factor that can have an impact on a company’s core business value – namely growth, profitability, capital efficiency and risk exposure – to be financially material. Factors such as a company’s ability to innovate, attract and retain talent, or anticipate regulatory changes matter from an investor’s point of view because they have significant impacts on a company’s competitive position and long-term financial performance.
As an asset manager, we have always focused on identifying financially relevant sustainability factors. For this reason, we have put considerable effort into developing and updating our materiality framework so that our analysts focus on those factors that are most relevant to the companies’ financial performance. This helps us ensure that we integrate financially material sustainability factors into our investment process in a structured manner. Because these factors are relatively under-researched by most investors, our integration of financially material sustainability factors in the investment process allows us to make unique and better-informed investment decisions for the long-term.
CFA, Head of SI Research
Our financial materiality framework draws upon more than 20 years of experience in integrating sustainability into the investment process. What sets us apart is that our approach focuses on the intersection between sustainability and business performance. Specifically, we focus on identifying the most important intangible factors that relate to companies’ ability to create long-term value. For instance, lowering energy consumption in manufacturing processes results in significant cost-saving opportunities and has a direct impact on a company’s bottom line. This focus on the most financially relevant sustainability factors is essential, given our mission to create long-term attractive returns for our clients through Sustainability Investing strategies. However, we have also found that a focus on the link between sustainability and business performance is also a key priority for the leading companies in sustainability, which are working toward much more sophisticated models to understand the pay-offs of their sustainability investments in financial terms.
The second in a series of joint studies published by RobecoSAM and the Global Reporting Initiative, this paper explores financial materiality trends across the Mining, Metals, and Electric Utilities sectors.
The first in a series of studies published jointly by RobecoSAM and the Global Reporting Initiative, this paper examines which factors investors and companies in the Technology Hardware & Equipment and Banks & Diverse Financials sectors consider to be financially material.
Once we have identified and prioritized the material sustainability issues for each industry, our analysis shifts to the company level and evaluates how well company management is addressing each of these factors. Based on this analysis, we adjust the assumptions of the return on invested capital and the weighted average cost of capital in order to obtain a fair value that balances short-term financial projections with the consideration of long term sustainability factors.
Essentially, we are determining which companies are most likely to remain competitive in a rapidly changing business environment and are therefore best positioned to continue to create value in a sustainable way.
Yes. A variety of sustainability factors are relevant to companies across a wide range of industries. These include innovation management, human capital management, supply chain management, environmental management and corporate governance. But we tailor the questions in these criteria to the specific characteristics of each industry.
Our Sustainability Investing Research Analysts work with our Quantitative Analysts to test the financial materiality of the criteria and questions included in the CSA. Our quantitative research identifies which intangible factors have demonstrated the clearest correlations to past financial performance. Results are fed back into the CSA methodology development process, and help determine adjustments to the CSA questions and criteria to ensure that they remains focused on financially material factors.
In turn, the CSA itself serves as an engagement tool by making companies aware of which sustainability criteria and topics RobecoSAM and investors consider to be financially relevant to business performance.
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