Home > News > Risk > Ignore ESG Risk at Your Own Peril

RiskJune 23, 2021

Ignore ESG Risk at Your Own Peril

Investors who overlook ESG-related issues may miss out on generating alpha, says data science firm RepRisk.

Investors are not always taking into account environmental, social, and governance (ESG) risks when assessing financial risks, and they do so at their own financial peril, says ESG data science firm RepRisk.

According to the Zurich-based company, nearly every big corporate scandal in recent years has been ESG-related, and these scandals can lead to reputational, compliance, and financial risks. However, the firm also says few companies have the ESG expertise to gauge how credible any public information is and analyze the severity of risk incidents.

Alexandra Mihailescu Cichon, an executive vice president at RepRisk, says that if a company wants to create long-term value, assessing ESG risks during the due diligence of a merger or acquisition will result in a deal with a more sustainable company that will enhance value creation for each company over the long term. And she says the company’s ESG Risk Platform is the world’s largest database on ESG and business conduct risks with information on more than 170,000 companies.

Provided as a software service, the platform offers risk research on companies, infrastructure projects, sectors, and countries. It is intended to identify industry-specific material ESG risks in line with the Sustainability Accounting Standards Board (SASB) standards, assess ESG risks of companies and projects, and monitor ESG risks via watch lists and an email alert. For example, it links a company or an infrastructure project to an ESG risk. And when a company is linked to an ESG risk, it gets captured in RepRisk’s daily screening and is added to its database.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The firm, which counts private equity firms, asset owners, sovereign wealth funds, pension funds, and other institutional investors among its clients, has an analyst team of about 120 people who do quality assurance and final analysis, while artificial intelligence (AI) does the heavy lifting.

Cichon adds that the platform is not only intended to manage risk, but can also be used to improve a company’s return on investment.

“This type of data can also help generate alpha,” Cichon said in an interview with CIO, citing a research report from Bank of America Securities that found RepRisk’s ESG data can be an effective alpha signal for investors. “Investors were able to not just reduce volatility, but also drive alpha performance. And they found that result across geographies, across sectors, across investment styles, and small and large caps.”

Cichon says she believes 2020 was a turning point for ESG investing because many investors had expected it to be sidelined by the COVID-19 pandemic, “but in many ways it strengthened ESG,” she said. She said companies are increasingly embracing ESG as a key part of risk management, and not just a corporate social responsibility activity. “It showed how what happens in our economy is linked very much to what is happening in our environment and our society.”

Cichon also said that while ESG matters are important to many investors on an emotional level, particularly younger generations, for RepRisk the focus is on the risk data.

“It’s not just about the ethics or philanthropy, it’s about good risk management and driving performance for companies and value creation in the long term,” she said. “I think the tide is changing. There’s a lot of evidence we can show to people who are still skeptical.”

Pandemic Magnifies Demand for Retirement Income

A BlackRock report finds plan participants and sponsors are increasingly seeking a steady retirement income stream.

By Michael Katz

The COVID-19 pandemic has increased demand among retirees for retirement income solutions, according to BlackRock’s annual “DC Pulse” survey, which also found that nearly half of defined contribution (DC) plan participants’ finances were negatively impacted by the pandemic.

“Workers saving for retirement today are concerned that they are going to outlive their savings, or that they may not enjoy the same kind of comfortable retirement previous generations did,” the report stated. “Plan participants, plan sponsors, and retirees alike all emerge from the pandemic with a sharpened focus on retirement security and the importance of retirement income.”

The survey is a research study of 225 large DC plan sponsors, as well as more than 1,000 plan participants and 300 retired participants in the US. It was conducted by independent research company Escalent Inc. All plan participants polled were employed full-time and had access to a workplace retirement plan at the time of the survey.

According to the survey, 77% of participants are looking for financial help not just on reaching retirement, but on getting through it, and 81% said it would be helpful if their employer provided secure income-generating options as part of their workplace retirement plan. The survey also found that, because of the pandemic, 37% of participants are more interested in owning a product designed specifically to generate income in retirement.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Some 56% of participants say they would save more for retirement if they had an emergency savings fund set aside, while almost half say that feeling confident about their short-term finances makes them feel more confident about their long-term finances.

Among retirees, 67% said they are confident they have enough money to last through their retirement because they have a pension or other source of income, which was the most common reason, while 76% said that having secure income during retirement makes a bigger difference than they thought it would. And 71% of retirees said they would have chosen a steady income stream through retirement if given the choice.

Plan sponsors are also interested in helping their participants secure retirement income, with 86% saying their participants would benefit from a target-date fund (TDF) with a feature that generates guaranteed retirement income. Likewise, interest in income products is on the rise as 82% of sponsors that do not currently offer a specific retirement income product said they are likely to add one during the next 12 months.

The survey also found that 47% of participants say the pandemic has had a negative effect on how on track they are with saving for retirement. Participants who did not feel like they were on track were disproportionately impacted by the pandemic, as 54% said COVID-19 set them back with saving for retirement compared with 36% of participants who said they were on track.

Meanwhile, 61% of plan sponsors say at least half of their employees’ retirement readiness was negatively affected by the pandemic, which the report said may be larger than what participants report because plan sponsors have a broader, data-driven view that provides a look into more of the negative effects of the pandemic. And more than half of plan sponsors who keep track of short-term 401(k) loan withdrawals said employees dipped into their retirement plans for emergency spending needs last year.