Sustainability reports do not always provide a comprehensive picture of a company’s performance. The LGT ESG Cockpit therefore incorporates qualitative but also quantitative factors when assessing sustainability.

By Alexander Zanker, LGT Capital Partners

Investors who are interested in investing sustainably very often use sustainability assessments to compare the standards and performance of companies with regard to sustainability.

Such assessments usually focus on performance in three areas: E, S and G, or in other words, environment, social and governance. Ideally, they evaluate both the products or services of the respective company, as well as the company itself. Generally speaking, there are two different levels of analysis that can be applied:

  • On the one hand, there is the qualitative review of a company’s measures and initiatives, for example, voluntary commitments, process descriptions for the attainment of sustainability goals, memberships to ESG organizations, etc.
  • On the other is the quantitative evaluation of certain indicators, which also provides important information for a comprehensive sustainability assessment, for example greenhouse gas emissions, the number of manufacturing accidents or employee wage structures.

Qualitative or Quantitative

It has been found that a purely qualitative approach based primarily on the examination of initiatives or rules results in big companies receiving systematically better sustainability ratings.

This is primarily due to the fact that these companies have recognized the growing importance of sustainability for investors, clients and the public, and have allocated the necessary resources to develop a broad spectrum of measures and initiatives, and publicize these widely. When assessing the sustainability performance of companies, it is therefore important to consider what has established itself as the standard in the direct comparison group. This is the only way to determine whether individual companies really compare favorably.

The introduction of guidelines and initiatives is an important step, but says little about the impact of these measures, and therefore skews the sustainability assessment. In the case of quantitative analyses, on the other hand, indicators are compiled which allow for conclusions to be drawn about the effectiveness of sustainability measures and in addition, are significantly more comparable than qualitative data.

Sustainability Assessments at LGT

At LGT Capital Partners, we have developed the LGT ESG Cockpit. This is a system that conducts sustainability assessments for companies and countries using data from external providers such as Thomson Reuters or Inrate.

When assessing companies in this context, we apply a wide range of qualitative and quantitative data and key figures to then, by means of our proprietary key performance indicators, get a comprehensive view of sustainability performance or portfolio construction, these sustainability assessments are also contrasted with the qualitative findings of our sector analysts. In addition, the sustainability analysis is also integrated with the results of the fundamental data analysis.

Materiality Counts

When conducting our sustainability assessments, we also take into account another aspect, what is known as materiality. The reason for this is that not all sustainability indicators are equally relevant for all companies.

For example, a bank’s direct greenhouse gas emissions are generally negligible because they have only a minimal impact on climate change, while projects the bank has financed have a much greater impact in this area. For a utilities or power company, on the other hand, greenhouse gas emissions are a very big, if not the biggest single contributor to the overall environmental impact of its business activities, and therefore very relevant.

Because of this fact, we have analyzed the key sustainability aspects for many different sectors in order to then single them out and weight them accordingly. As part of this process, we also took into account very industry-specific data such as industrial accidents or emissions from certain dangerous chemicals, which were included in the weighting of the sustainability data for various sectors.

We are convinced that this enables us to produce sustainability assessments with a higher level of precision.

Alexander Zanker is responsible for the proprietary ESG Cockpit analysis tool used at LGT Capital Partners. This tool uses external data as a basis for assessing the sustainability level of a large number of companies around the world, as well as countries. He entered the world of finance after successfully completing his degree in physics at Technische Universität Stuttgart. Over the past few years, he has focused on a number of different quantitative issues in the sector.