CFA Institute launches ESG manual

Kurt Schacht, CFA, managing director of the CFA Institute Centre, expanded by saying that “these topics are now part and parcel of the metrics used by investment professionals to analyze and value the public companies they invest in.… [This] ESG manual will help clarify and decipher the sparse and inconsistent ESG information provided in the current financial reports coming from companies.”

Orsagh explained that the decision to release this manual came on the heels of the institution’s participation in the United Nations’ creation and adoption of Responsible Investing Principles, released in 2006.

“We have 95,000 members worldwide, and we can’t assume that all of them have the same amount of sophistication. That’s where the idea of a baseline manual came from.” Orsagh added that the manual is recourse for the institute’s members — and all investors — and enabled them to sift through the jargon, learn the different organizations involved with ESG and review a glimpse into these concepts. “It’s then up to the investor to drill down as much as they wish.”

The report, which cites more than 25 academia and brokerage studies dating no earlier than 2002, is an effort to show that non-financial factors do have an impact on a company’s bottom line.

“We compiled a manual on the impact of governance in 2005. Governance covers a lot, but it doesn’t cover the E and S of ESG,” explained Orsagh. “This ESG manual is really a growth out of that project. It’s an effort to determine what other non-financial issues that can’t be found on a balance sheet that investors need to consider.”

As such, this ESG manual cites several statistics about the growth of the ESG importance to investors, including the following:

• Many large investment firms, including Citigroup, Goldman Sachs, JP Morgan, UBS and West LB, have already implemented dedicated ESG units.
• According to Demystifying Responsible Investment Performance, a 2007 report from the Asset Management Working Group of the UN Programme Finance Initiative, there is a positive correlation between a company’s ESG behaviour and the impact on its bottom line.
• In April 2006, investment funds representing more than $4 trillion US in assets backed the UN Environment Programme Finance Initiative and the UN Global Compact Principles for Responsible Investment (PRI). Currently, more than 300 global institutions representing over $13 trillion US have endorsed the PRI.

The simplified case studies under each component of ESG offers advisors an opportunity to appreciate how these non-financial factors affect a company — and how that can affect the bottom line.

“We talk about the risks and responsibilities, which are important. While investors are generally well versed in analyzing a public company’s financial data, they are finding it challenging to understand and incorporate non-financial ESG metrics into their research models,” said Orsagh, who was project manager for the ESG manual. By examining the risks of these issues on the bottom line, a better assessment of the investment can be made.

Orsagh also believes that the information and proposals offered in the manual reflect the global perspective offered by the institute’s advisory board and the manual’s international experts. “This manual is a reflection of what is going on around the world — Japan, Australia, Taiwan — not just New York [where the CFA Institute is located].”

The next potential step, though not for the institute, said Orsagh, is the introduction of ESG accreditation within the financial planning field.

“Right now, a lot of research in this area is in its infancy, but if there is a demand for [specialized accreditation] it will develop naturally.”

The manual can be viewed at http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2008.n2.1

Filed by Romana King, Advisor.ca, romana.king@advisor.rogers.com

(07/08/08)