European investors were recently reminded how tricky it is to evaluate a company’s environmental, social and governance (ESG) credentials. Tesla’s plans to chop down a forest to build a manufacturing facility for electric cars in Germany reinforced the need for independent research and engagement to assess the risks and opportunities created by ESG controversies.
How can investors really know how well a company is dealing with ESG challenges? When Tesla secured approval from a German court in February to raze a forest in order to build its first assembly plant in Europe, it showed that even a high-profile ESG darling may engage in environmentally unfriendly activities that standard ratings don’t capture.
ESG ratings produced by agencies like MSCI and Sustainalytics have an important role to play in assessing corporate behavior, but don’t always tell the full story. With an integrated approach that looks at a company’s ESG performance and outlook as part of a fundamental analysis of valuation, cash flow and return forecasts, we believe that investors can gain a broader perspective on a company’s sustainability performance that may not be fully understood by the market.
Adding an ESG Lens to Fundamental Research
Misunderstood companies often make for good investments. That’s because investors tend to push down share prices of companies that suffer from poor operating performance, industry challenges or competitive threats. When the concerns are exaggerated, the company may be valued incorrectly. This is true in the ESG domain, too.