Turning ESG analysis into valuation

Robeco’s ESG integration chief Masja Zandbergen outlines how effective ESG analysis can lead to better investment decisions.


Kate Lin

Valuation and the price target of an invested company are subject to adjustment after a multi-year process of ESG analysis gets underway, according to Masja Zandbergen, head of ESG integration at Dutch asset manager Robeco.

Zandbergen explained to our sister publication Fund Selector Asia how her firm’s ESG approach involves engaging with portfolio companies.

During the engagement process, the team asks the company to meet specific goals. If the results are unsatisfactory, the initial valuation of the company when the position was initiated could be reduced, she said. If, after three years, the company is not satisfactorily making progress toward stated ESG goals, the firm would sell the position.

As an example, Zandbergen cited a steel producer in Asia. Initially, the financial analysis for the stock showed that there was a potential stock price upside of 176%. It also had a 6.5% weighted average cost of capital (WACC), which is used to calculate valuation.

After ESG analysis, her team found that one of the company’s subsidiaries had allegedly engaged in deforestation activities in Indonesia. The analysis also uncovered that the former chairman, who was believed to have a connection with a “slush fund”, was arrested. The analysts therefore brought the stock price target down to roughly 60% upside. The WACC was raised to 8.5%, bringing down the valuation.

The ESG process requires the mutual effort of the asset manager and the company to meet stated goals, she said. But if the companies are reluctant to engage, Zandbergen said her firm would not experiment by offering different objectives.

“There was one company that we invested in that had become unwilling to disclose information. Our analyst decided to fully exit the investment due to excess risks that are not paid off by the expected returns.”

ESG engagement themes

In 2018, the firm has been working with companies in the area of climate action, waste reduction, cybersecurity, governance and food security.

She said that the ESG process is not limited to climate change or environmental issues. The analysis should cover topics that are closely related to a company’s business operations and financial reporting.

“Engaging with banks, we do not want to report on the paper use or carbon dioxide emission.”

The investment team is more interested in how the banks take into account sustainability consideration in, for example, their loan portfolios and lending practices and product stewardship and risk management culture, she added.

In the food production sector, the approach begins with analysing the pricing strategy and product features. For example, the analysis includes the comparison of the calorie intake between Kellogg, Nestle and Unilever products, which provide more insights into how companies are dealing with the issues.

“Food manufacturers are accountable for the obesity issue in society. As regulations and consumer preferences are changing, investors would like to understand more how these companies react to that,” she added.

The firm does not only engage with the worst-in-class ESG profiles. She believes working with companies that have had clear progress using an ESG policy can help the team understand best practices and inspire poor performers.

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