Equity research is a key area in the field of equities that makes the entire process more exact and comprehensive. Equity research professionals produce analysis reports and make recommendations to form strategies relating to equity investments.
Equity research helps investors decide when to buy, sell or hold on to investments. Investment banks lean heavily on equity research for making accurate and prompt decisions for their clients.
Equity research reduces the guesswork inherent to the process and provides more scientifically based solutions. It is showing more and more promise in the digital age of algorithms, artificial intelligence (AI) and machine learning (ML).
What is ESG investing?
Despite the significant advancements in equity research, one needs to make ethical considerations when planning strategies. To invest responsibly, individuals and organisations should not evaluate targets using only financial parameters. They also need to factor in non-financial elements relating to the environment and society.
Aligning business activities with empathy for the environment, social responsibility and good corporate governance is a good start. Having empathy for the environment and being socially responsible are elements of good corporate governance.
Companies that function in this manner are said to practise environmental, social and governance (ESG) investing.
ESG is a class of investing that also goes by the term “sustainable investing”. It refers to investing to achieve a long-term impact on aspects of a business’s environment, society and performance. With the advancements in technology today, ESG is an integral part of equity research.
Elements of ESG
To better understand why ESG is vital to equity research, we need to know the elements of ESG. They are as follows:
Environmental Aspects
- Sensitisation to climate change
- Biodiversity
- Culture of energy efficiency
- Eradicating water scarcity
- Conserving nature
- Attention to deforestation
- Waste management
Social Aspects
- Customer satisfaction
- Gender and diversity
- Community relations
- Robust labour policies
- Data protection policies
- Employee engagement
- Human rights
Governance Aspects
- Board composition
- Approach to bribery and corruption
- Political contributions
- Ethical standards for running a company
- Audit system
- Lobbying position
- Whistleblower schemes
Why ESG is so important in equity research
ESG equity research provides valuable inputs for the equity investment process. The following are some reasons why ESG can benefit the process of equity research:
Appeals to Investors
Investors are now smarter than ever before. They are also very aware and want to invest responsibly. Green investment funds are more attractive to investors, and this is a part of ESG; therefore, fund companies with good ESG scores are preferred.
Improves Performance
Portfolios with high ESG scores tend to show optimised performance. The reason is that ESG is an aggregation of many factors that generate the best results in the equity research process.
Makes ethical considerations
By using ESG in equity research, the results will always show investment opportunities in ethical fund sources. It generates business that has a positive effect on society.
Deals with future trends
ESG analysis does not only deal with what is happening at present. It also considers future trends and includes disruptive change. This could impact the future profitability of a company or even its very existence.
Provides better financial indicators
Companies that rely heavily on ESG analysis experience lower capital costs, and their earnings are less volatile. This presents a lower market risk than that to a low-ESG-score company.
By using ESG equity research, a team can “pick” and “recommend” potential big wins to money managers, increasing the base of new clients and enhancing stickiness with existing clients.
Increases preparedness for regulation
If a company invests in renewable energy infrastructure and technology, it contributes towards reducing carbon emissions. This, in turn, reduces costs that originate from environmental tax or payments, indirectly supporting carbon emissions.
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The future lies in ESG equity research
Today, big businesses face more challenges than just trying to make profits. Sustainability issues such as inequality, ageing populations and climate change need to be addressed.
They need radical solutions to effect a significant change, which in turn could benefit the global financial system. Companies recognise this and are becoming more responsible in the way they pursue their business goals.
Companies will benefit from ESG-driven equity research because of the reasons outlined here. Equity research needs to be based on these factors at every step so that robust investment strategies could be formulated to take companies forward in a responsible way.
Using ESG in equity research and other areas of running a business is an excellent way of bringing together more responsible investors.
Read more about how to examining emerging esg reporting companies trends and their impact of toward the systematic creation and management of a scalable, cohesive, and effective ESG strategy
