A study by the CFA Institute examining the integration of ESG issues into investment portfolios found that while investors believe that ESG impacts share prices, only 19% of equity analysts ‘often or always’ include material ESG issues into their analysis, while a further 52% ‘sometimes’ do.
Equity investors think ‘Governance’ factors are far more impactful on share prices than ‘Environmental’ or ‘Social’ factors. 60% believe that ‘Governance’ factors ‘always or often impact share prices’, while only 24% think the same about ‘Environmental’ or ‘Social’ factors. Fixed income investors similarly place higher importance on ‘Governance’ over ‘Environmental’ and ‘Social’ factors, with 47% responding that ‘Governance’ ‘always or often affects corporate bond yields/spreads’, while only 18% believe the same about ‘Environmental’ factors, and 16% about ‘Social’ factors.
The survey reveals that while investment professionals recognize the importance of ESG—and particularly G—factors on share and bond performance, they are struggling to figure out how exactly to incorporate this into their analytic process and investment decisions. One group of problems investors encounter is in the definition, categorization, standardization, reporting and quantification of these different factors, something that we have discussed before.
It is, however, possible to objectively measure and independently validate company performance on the most pressing ‘G’ issue today. The Cyberhedge Cyber Governance Indices provide market-based proof that cyber governance (a core ‘G’ factor that also has ‘E’ and ‘S’ implications) not only matters, but that it is externally measurable and independently validated. Highly ranked companies (those that do a good job managing technology risks) consistently outperform lower ranked companies within every sector and overall, in every major financial market (US, EU, UK). Utilizing only externally gathered cyber and financial data to assess companies, this performance has been consistent since the indices launched in December 2016.