Jeremy Taylor
Growing environmental concerns, and the concerted effort to tackle them on a global scale, are generating largescale changes across multiple industries.
The ability to more precisely identify how environmental regulations are driving industry changes, and having a deeper understanding of their impact on related companies and sectors, could offer investors a structural advantage, note a leading investment manager, Lazard Asset Management.
In a recent research paper, Jeremy Taylor, Managing Director, Co-Chief Executive Officer, Lazard Asset Management Limited (London), says “We believe that active, bottom-up fundamental managers are better able to anticipate the risks and opportunities created by structural shifts compared to other approaches that rely on static assessments, owing to a thorough appraisal of financial statements and regular engagement with company management to generate unique insights into how different businesses are developing.”
Mr Taylor along with co-authors Nathan Cockrell, Managing Director, Co-Director of Research and Research Analyst, Alistair Godrich, Senior Vice President, Research Analyst and Neil Millar, Senior Vice President, Research Analyst present various “implications for investors”.
“As public concern about climate change has deepened and the bank of related legislation grown, global investors have worked hard to determine the impact of environmental considerations on their investment allocations given that it affects almost every aspect of a portfolio, from return expectations to sources of risk.
“As an example, in this paper, we focus on three industries that we believe aptly illustrate the impact of global low-carbon goals on business models, namely the automotive, shipping, and oil refining industries.
“These three sectors serve to illustrate the structural shifts and second-order effects that are being created by vast swathes of environmental regulation. Understanding the impact of these factors on a company’s outlook and being able to anticipate them can be a challenge, even for well-informed investors.
“While there is a growing acceptance that a company’s ESG practices can affect its valuation and financial performance, tying the underlying factors together is rarely a straightforward process, as many factors relating to ESG are often subjective, and difficult to track and quantify.
“Furthermore, the impact of ESG factors is likely to differ across companies, sectors, and regions, and change over time. Unsurprisingly, investors have increasingly relied on ESG ratings to provide useful insights and help guide security selection.
“While ESG ratings offer valuable inputs, we believe that in isolation they are insufficient to accomplish our objectives as they have some shortcomings that we believe can only be resolved through rigorous bottom-up fundamental analysis.
“Frequent and thorough company engagement and the integration of meticulous ESG analysis into investment processes could potentially help investors sidestep the significant losses that tend to accompany ESG failings,” they note.
The full paper is available at: https://www.lazardassetmanagement.com/no/en_uk/research-insights/investment-research/The_Growing_Importance_of_the_E_in_ESG