2030 Finance | June 27, 2018

Going ‘beyond ESG’ to deepen understanding of investment risk

Dennis Price
ImpactAlpha Editor

Dennis Price

How susceptible is a company to climate regulations? How endemic is bribery in the sector? How will sentiment shift as consumers learn the impact of a company’s product?

Today, some $10 trillion in assets are screened for their performance on environmental, social and governance, or ESG, factors. But even ESG doesn’t capture the full scope of risks facing companies today.

In a white paper, Impax, the two-decade-old sustainable investment manager, tries to go “Beyond ESG,” to provide a visual map of company risks that show the relative importance of issue over time. “Portfolios that account for the risk of both sudden shocks and gradual value erosion tend to outperform, especially over longer time frames,” writes Impax’s Ian Simm. With $15.6 billion in assets, Impax has large holdings in water, food and agriculture, and environmental strategies.

The Impax Risk Lens

  • Systemic approach. Three concentric circles in the Impax framework put “company” risks at the center, “stakeholders” in the first ring and “wider landscape” in the outer ring. For each component, the asset manager identifies short and long-term risk factors, including, for example, impact of regulations to mitigate climate change, health impact of products, or reputational risk from supplier safety lapses.
  • Limitations. The ESG framework conflates internal corporate issues (“G”) with just two external issues (“E” and “S”). “We may ask why just these three factors are focused on?” Impax asks. And how do they compare with other investment risks?