Integrated analysis is an SRI investment style in which analysis of environmental and social issues contributes to financial analysis by identifying additional sources of risk and opportunity, thereby contributing to better overall investment decision-making.
This strategy requires a fundamental shift in the analysis undertaken. Instead of asking if a company is inherently ‘responsible’ or more ‘sustainable’ than its sector peers, SRI analysts now need to identify how influential that ‘responsibility’ or ‘sustainability’ will be on the market value of the company’s stock price in future.
Instead of ranking the environmental and social performance of various companies and sectors, investors now need to understand, for example:
- Whether downstream demand destruction will destroy the economics of oil sands projects
- Whether the telecoms opportunity at the bottom of the pyramid – particularly in emerging markets – will be material
- How financial services companies are going to re-establish the trust that is so fundamental to their franchise
- What the changing climate will do to agricultural supply chains and to companies that depend on them
- How utilities will manage the fundamental disconnect between carbon constraint and coal-fired power generation
- Whether premium pricing for ‘ethical’ products will be available in recessionary times
It should be noted that these questions are as likely to come from ‘mainstream’ as from ‘SRI’ investors. Indeed mainstream investors often ask questions about employee relations, technology development and market opportunities. Although these issues all have social or environmental dimensions, the investors will never brand their questions as ‘sustainability’ or ‘CSR’.
This trends is, of course, taking place against a wider recognition that the private-sector engines of economic growth have ‘systematically’ failed to control their wider social and economic impacts.
As these factors converge, companies should prepare to answer many more financially-focussed sustainability questions and many more sustainability-focussed financial questions.
