Integration
Integration refers to the inclusion of potentially material social, environmental, ethical or corporate governance risks and opportunities into normal investment processes.
In this section:
What is integration?
Why use integration?
Methods for integration
Adopting an integration approach
Further information
What is integration?
Integration is the process by which fund managers include potentially material social, environmental, ethical or corporate governance risks and opportunities into normal investment analysis, stock weighting and/or stock selection processes.
It is based on the premise that extra financial criteria can have an impact on the financial bottom line in the long-term.
It considers how companies manage potential social, environmental, ethical or corporate governance risks that could damage their business.
An example of risk is the concern over obesity and how food and beverage companies are responding to the growing health crisis and its potential impact on their business. Another example is the way in which companies are responding to the potential impacts of climate change on their business.
Why use integration?
- to manage SEE risks
- to identify potential out-performance
- to identify superior management of SEE and corporate governance factors - seen by some as an indication of management quality
- to focus on the most material value drivers
- to generate insight into the market by looking at under-analysed themes
- to take account of increasing regulatory pressure on social and environmental factors
For some, integration fits with a trustee’s duty to act prudently.
A Freshfields Bruckhaus Deringer study concludes that, “the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”
Methods for integration
The analysis on such issues can be undertaken by fund managers and/or specialist researchers who feed information to the fund manager. Good analysis may involve engagement with companies, which can allow the researchers or fund manager to influence companies where social, environmental, ethical or corporate governance issues are not being managed appropriately.
Adopting an integration approach
Charities could decide to use the services of a fund manager with an active integration policy in addition to, or instead of, employing other SRI strategies.
Charity clients may wish to seek clear information on the methods and processes used for integration in order to understand how issues of concern may be incorporated into investment decisions.
Charities may ask fund managers:
- how do you practice integration of SEE and corporate governance matters in your investment process?
- how do you determine what issues to focus on?
- how does it affect your Company valuations and investment returns?
- what resources do you have for integration (internal and external)?
- how do you measure its success?
Integration is a sophisticated approach that is most likely to be used by charities with large sums to invest.
Further information
A study by leading international law firm Freshfields Bruckhaus Deringer for the United Nations Environment Programme’s Finance Initiative (UNEP FI) considered the legal implications of integrating environmental, social and governance considerations into investment decisions. The study was primarily focused on pension funds but its findings are relevant for all long-term institutional investors, which can include foundations and charities.
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Principles for Responsible Investment
There is a growing view among investment professionals that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios. Investors fulfilling their fiduciary (or equivalent) duty therefore need to give appropriate consideration to these issues. The Principles for Responsible Investment provide a framework for doing so. The Principles provide a menu of possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices. Asset owners, investment managers and professional service partners can become signatories to the Principles.
