The Markets July 19, 2016

Understanding of ‘Material’ Shifting in ESG Space

Research from global analytics firm Cerulli Associates finds that institutional investors in general no longer limit review of their assets to traditional financial metrics such as revenue, profitability, or valuation.
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There is an increasing amount of evidence to show environmental, social, and governance (ESG) practices of publically traded companies correlate directly with other astute business procedures—supporting positive financial performance.

According to Cerulli’s third quarter 2016 issue of The Cerulli Edge – U.S. Institutional Edition, a growing percentage of asset managers proactively consider ESG factors in conjunction with traditional financial analysis to identify risks and opportunity when investing in companies and evaluating their business practices.

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Although many asset management firms have adopted ESG principles, “determining how to implement them remains a work in progress,” warns Michele Giuditta, associate director at Cerulli. “More than half of consultants polled by Cerulli have dedicated resources for ESG manager research, and others are considering adding resources. Cerulli urges asset managers who are not taking ESG criteria into consideration to re-evaluate this decision.”

In addition to their own interest in boosting investment performance, investor demand is another top reason why investment managers are taking ESG issues into consideration, Cerulli finds.

“Investors no longer limit review of their assets to metrics such as revenue, profitability, or valuation,” the report explains. “Strong ESG can correlate with astute business practices and positive financial performance. The financial crisis of 2008 and several cases of management misconduct have prompted institutional investors to conduct deeper operational due diligence before allocating to hedge funds, for example.”

According to Cerulli, some of the ESG considerations that U.S. institutional investors increasingly consider include “political contributions, executive compensation, air and water pollution, deforestation, labor standards, human rights, and many others.” The vast majority (88%) of asset managers integrate at least some of these “ESG risks and opportunities” into their general financial analysis. “However, they vary in how comprehensively they conduct their research,” Cerulli warns.

NEXT: What sound ESG practices look like 

Given that sound ESG practices can add value to portfolio companies and mitigate risks, Cerulli believes that the longer-term benefits will generally outweigh the costs of ESG due diligence.

“Investor demand is already the top reason why alternative investment managers take ESG issues into consideration, with 75% citing this as a motivation,” the report continues. “The objective of an effective operational due diligence process is to identify, and then mitigate to the best extent possible, operational risks that could lead to material losses for investors.”

Some institutional investors are asking increasingly specific and directed questions of the asset managers themselves during due diligence investigations into new providers, for example questioning how well the asset managers’ employees are trained and policed on compliance policies or data security. 

“These factors should not be overlooked,” Cerulli concludes. “A thorough manual is useless if a hedge fund’s employees do not bother reading it. Using more well-known and highly regarded third-party providers can help speed the process and alleviate business concerns, especially for smaller [investment providers].”

Additional findings and more information on obtaining Cerulli reporting is here. 

Data & Research July 19, 2016

Financial Stress Afflicting Many Workers

Eighty-five percent of workers experience some level of financial stress.

 

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Financial Finesse, in its annual Financial Stress Research study, found that many workers are experiencing such stress and that it is having debilitating effects on their lives, including their work. The primary factor that determines a person’s financial stress level is cash management, and Financial Finesse found this skill varies widely among individuals.

Among people who have manageable financial stress, 80% have a handle on cash flow, 59% have an emergency fund, and 95% pay their bills on time. For those who have unmanageable financial stress, only 36% have a handle on cash flow, 16% have an emergency fund, and 67% pay their bills on time. Financial Finesse’s study found that 25% of workers experience high or overwhelming financial stress—but 85% of workers feel at least some level of financial stress.

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Unmanageable stress levels, according to Financial Finesse, indicate that people feel helpless and are living paycheck to paycheck, with expenses exceeding their income and large debt balances.

Liz Davidson, CEO and founder of Financial Finesse, says her company has developed the “C.A.L.M.” model to help people get a handle on their finances. “C” stands for creating a plan to manage cash flow. “A” is for automating bill payment and saving for emergencies. “L” stands for lowering nonessential spending, and “M” is for making progress one step at a time.

The demographic group most at risk for high financial stress levels are women younger than 30 who have minor children at home and earn less than $60,000 a year; 54% of these women report high or overwhelming financial stress. Financial Finesse notes that an AP-AOL Health Poll found that people carrying high debt levels struggle with depression, anxiety and heart problems. They also experience relationship issues and substance abuse. This should be a concern to employers, Davidson notes.

Luckily, she notes, an Aon Hewitt report found that 89% of employers are interested in offering financial wellness programs. Financial Finesse’s full report can be downloaded here.

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