Sustainable underlying analysis by Vontobel

 

Sustainability is a concept with many facets that is defined first and foremost by those who demand it. Sustainable development can be seen as a response to the immense global challenge of reducing consumption of natural resources in view of their increasing scarcity without hampering the development of emerging and frontier economies.

With this in mind, we believe that sustainable investment must be defined in the same terms as sustainable development. We thus call an investment sustainable if social and environmental concerns are factored into the investment decision as well as financial ones.

At Vontobel, it is our view that selecting companies based on thorough sustainability analysis adds value in two respects: higher or more stable returns due to greater economic success and a positive contribution to sustainable development. This is backed up by scientific studies.

The analysis performed by Vontobel Asset Management's ESG Competence Center serves to identify companies that are more sustainable in the sense described above than their competitors. It uses important environmental and social criteria that are either not yet covered by conventional financial analysis (and thus the securities markets) at all or receive insufficient and unsystematic coverage. Our sustainability analysis thus complements conventional financial analysis, increasing the information efficiency of the investment process.

In principle, it works on two levels: sector and company.

(1) Sector analysis involves comparing the impact of all sectors of the economy on the environment and society and rating them in terms of their positive or negative contribution to sustainable development.

(2) Company analysis involves assessing each issuer of securities on the basis of a detailed matrix of criteria to determine how it handles the social and environmental risks and opportunities in its sector. This results in a company rating.

The Vontobel Sustainability Monitor then combines the sector and company ratings. The sector rating sets the minimum sustainability requirements for a company to qualify as investable. The lower the sector rating, the higher the company rating needs to be. In other words, higher sector-specific social and environmental risks mean more stringent requirements as regards how a company addresses these risks, as well as any opportunities.

The sector rating is a measure of the impact some 50 sectors have on the environment and society. The environmental criteria include use of resources, emissions, and waste; the social criteria include working conditions and social conflict potential.

The company rating is a measure of a company's sustainability performance based on a comparison within its sector, i.e. a chemical firm is compared against other chemical firms or the sector average. This is why we talk of a "best in class" approach. Vontobel uses a matrix of criteria for company analysis that is divided into three areas: environmental, social, and governance.

(1) The first looks at the company's measures to protect the environment and its environmental performance throughout the product life cycle (supply chain, production, development, use, and recycling or disposal). This includes measures to reduce energy consumption in production and the actual energy savings or improvements to the energy efficiency of the finished product that result.

(2) The social analysis tells us the extent to which a company considers the interests of various stakeholders such as suppliers, staff, society, and customers in order to minimize the potential for conflict. This includes human resources aspects such as health and safety (e.g. frequency of occupational accidents), co-determination and involvement of staff, equal treatment for women and minorities, redundancies, the quality of the working environment, and training opportunities.

(3) Last but not least, the governance part assesses the extent to which a company’s strategy and internal organization (management) take account of the relevant sustainability risks and opportunities. The management criteria include the entirety of corporate governance in the narrower sense, sustainability management (covering environmental protection, health and safety, human resources, supply chain, etc.), ethical considerations, and internal and external communication.

The Vontobel Sustainability Monitor uses this information to define the universe of sustainable underlyings, which is normally updated every month.

For more information about Vontobel's sustainability analysis of companies, please consult our Asset Management brochure „Corporate sustainability analysis“:

Corporate sustainability analysis