More transparency: Kaiser Partner Privatbank’s new Fund Factsheets

In addition to the usual wealth of information, Kaiser Partner Privatbank’s Fund Factsheets now also detail the extent to which fund managers consider environmental, social and corporate governance criteria when selecting their investments. There is a growing consensus that these “ESG” criteria can have a major influence on a company’s performance. Dr. Ingeborg Schumacher-Hummel, Senior Advisor Responsible Investing, tells us more.

More and more analysts and fund managers are integrating ESG factors into their standard investment processes. So far, around 500 investment managers and more than 200 institutional investors have made a public commitment to implementing the Principles for Responsible Investment (PRI), thus helping to embed them in financial market practices. This recognition of what were previously seen as non-financial criteria reflects the fact that they add value for investors. Many financial managers believe that ESG data correlates closely with how well a company is run.

For example, Kaiser Partner Privatbank’s 2009 annual report mentioned the negative financial consequences of inadequate safety systems at BP’s Texas City oil refinery in 2005. Then in spring 2010 many investors had to share the pain when an explosion at the Deepwater Horizon oil rig cut BP’s market value in half. This manifestation of ESG risk confirms the view that a systematic appraisal of ESG information is vital to any good investment decision.

When analyzing the ESG performance of companies issuing bonds and shares, individual ESG measures can be combined with aggregated ratings. There is also now a good store of information that can be used to analyze the quality of supranational organizations and countries as bond issuers.

Kaiser Partner optimizes its selection of issuers by systematically combining assessments of creditworthiness risk with ESG evaluations when making bond recommendations. Our portfolio managers tend to use investment funds for their equity allocations. Though an increasing number of equity funds explicitly apply sustainability criteria, the choice is still too narrow to allow managers to completely cover the required asset allocation.

Exclusive method of fund evaluation
This lack of coverage prompted Kaiser Partner to team up with an external partner to develop an exclusive method of evaluating the extent to which conventional funds also take account of ESG factors. A combination of quantitative and qualitative analysis is used. The quantitative component involves the application of key criteria to individual stocks in the fund.

On the environmental side, for example, we look at the company’s CO2 emissions, as well as at the energy and water-intensity of its activities. The social criteria include benchmark figures relating to safety at work, employee fluctuation and the percentage of women in management positions. Corporate governance is measured using accepted points of reference, including the proportion of independent directors sitting on the board. All of this data is recorded for each stock in the fund and then aggregated at fund level.

In addition to the analysis of company data, independent information on controversial environmental and social risks is also considered. This is taken from a database of media reports and information provided by environmental organizations. Each source is weighted by relevance and flagged accordingly.

The results of this analysis are supplemented and verified by a qualitative appraisal based on interviews with fund managers. The questions we ask focus on international guidelines such as the Principles for Responsible Investment (PRI) and the standards for sustainable fund reporting.

Comparing ESG performance
We also gather information relating to the peer group as a whole. This lets Kaiser Partner Privatbank’s portfolio managers and advisors, and of course their clients, see how a particular fund measures up to its direct competitors. The results are presented for each individual area – E, S and G – together with an overall assessment.

The continuous integration of ESG criteria into the portfolio management process adds another dimension to risk assessment. Additional potential risks that could influence a company’s value and earnings outlook are highlighted. The analysis helps improve fund selection by focusing it on the very latest insights.

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