THE COWEN INSIGHT
As ESG has grown in importance to investors, we examine the evolution of ESG investing, why it should matter to all investors, and evaluate companies along each vertical with an ESG lens.
As ESG-linked assets under management (AUM) continues to increase, we believe the stock performance of publicly traded companies will be increasingly influenced by their performance along ESG lines. Given the intensive energy consumption of our covered companies, we believe the use of renewable energy will have the greatest impact on their stock performance over time.
ESG Analysis Framework
One of the key ways to judge a company’s ESG initiatives will be to compare it to other companies within its sector. ESG is sector specific. What matters to one industry won’t necessarily matter to another.
With ESG growing in importance to investors, our report aims to provide a framework for evaluating the companies within our universe with an ESG lens. However, through our analysis we found that companies are at different stages of their ESG journey. Thus, the level of ESG disclosures are wide ranging, and in some cases completely absent. This makes apples-to-apples comparisons along ESG lines challenging.
That said, as ESG investing continues to gain traction, we would expect a universal ESG reporting framework to become adopted and for companies to provide more fulsome and consistent ESG disclosures that will improve comparisons.
What Is Proprietary?
As part of our analysis, we leverage information that is publicly disclosed via disparate sources to draw conclusions on the performance of our covered companies from an Environmental, Social, and Governance perspective. In our report, we aggregate the relevant ESG data points for our coverage universe. We provide a framework for thinking about what we believe are the most important components of ESG for each of the subsectors we cover, particularly as it relates to the Environmental component of ESG. In addition, John Miller of Cowen Washington Research Group provides an overview of the evolution of ESG investing as well as an outlook for the road ahead.
Financial & Industry Model Implications
ESG-linked AUM is expected to increase notably over the coming decades. As incremental capital is managed under an ESG lens, we believe the stock performance of companies in our coverage universe will become increasingly influenced by their performance along ESG lines. In particular, given the intensive energy consumption of companies in our coverage universe, we believe the use of renewable energy sources by companies in our coverage universe will have the greatest impact on their stock performance over time. In follow-up reports, we intend to analyze the different options for renewable energy and their potential cost impacts to better understand their practicality and potential financial impacts of adoption.
What to Watch
As ESG investing continues to evolve in the years ahead, we would watch for the emergence of a universally accepted ESG reporting framework for companies to follow. With a standardized framework for all companies to report ESG metrics, we would expect companies to provide more fulsome disclosures, particularly under the environmental vertical of ESG. As disclosures improve, both investors and fundamental analysts will be positioned with greater visibility into the ESG profiles of companies, allowing investors to make more informed ESG investment decisions.
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