However, there is still a debate among these investors as to where to turn for good information on a company’s ESG performance.
Aaron Yoon, Assistant Professor of Accounting and Information Management at the Kellogg School, said:
In a new paper, Yoon explores whether reports published by traditional financial analysts are useful sources of ESG information. The financial analyst is not known to be on the cutting edge of ESG, but he is expected to have deep knowledge of all aspects relevant to the shareholder value of a target company, he said. say. So it’s no surprise that this extends to his ESG-related issues.
Yoon and co-authors examined whether stock recommendations and price targets published by financial analysts are consistent with the companies’ subsequent ESG practices. In particular, the researcher explored whether the analyst’s downward stock recommendations predict any negative his ESG incidents (such as labor rights violations or oil spills), and whether the analyst’s favorable recommendations predict these incidents. I wanted to understand if it predicts less Yoon, along with Min Park, an assistant professor at the University of Kansas Business School, and her Tzachi Zach, an associate professor at the Ohio State University Fisher College of Business, used data tracking her unfavorable ESG events to do this. I investigated.
Researchers found that when it comes to ESG risks, analyst recommendations actually align with company behavior over the next year. While the analyst’s stock revisions (e.g., ‘buy’ to ‘neutral’ or ‘neutral’ to ‘sell’) negative for companies predicted that his ESG incidents would occur more frequently the following year , upward revisions predicted less frequent ones.
And researchers, in particular, found this pattern to hold even when adjusting for changes in scores from ESG-focused rating agencies. This suggests that analysts are predicting her ESG risks at least as well as her ESG-focused analysts.
“I think investors will be interested in these results,” says Yoon. “I think they get confused every time about which of his ESG raters to use and which of his ESG signals to use in general.”
Aggregation of operational risk
Researchers decided to look at how good analysts are predicting ESG operational risk. In general, operational risk refers to the types of risks companies and their leaders take in the day-to-day operations of running an organization. Some operational risks are ESG-related, such as workplace health and safety oversight, hazardous waste and water management, while others are not, such as the risk of disruption to the supply chain.
This research has two purposes. First, the researcher wanted to understand whether analyst reports were a useful source of information for her ESG-conscious investors. Second, we needed to assess the analyst’s performance on operational risk. This has historically been a difficult task.
“People want to think analysts have some insight into operational risk, but analysts claim they do, but there was no evidence anyway,” Yoon said. say. “I found a unique way to test whether the analyst had insight into her ESG and operational risks.”
For the analysis, the researchers used datasets from RepRisk, a Swiss-based ESG data company that tracks corporate ESG-related incidents. RepRisk uses machine learning to check 100,000 multilingual information sources daily, including print media, online media, social media, and government agencies. Yoon is a member of RepRisk’s Academic Advisory Board.
unlocking predictive power
Researchers’ research showed that analyst recommendations actually correlated with future adverse ESG incidents.
Specifically, every time analysts downgraded a company by one notch, that company experienced 1.79% more negative ESG operational incidents than the average company over the next 12 months.
In subsequent analysis, analysts intentionally or intuitively update the “expected risk” in assessing how much earnings a company is expected to generate in the future to account for additional ESG risks. was found to reflect
Also, as analysts consider information from both corporate ESG disclosure reports and industry-specific reports from the Sustainability Accounting Standards Board (SASB) highlighting financially material ESG issues. I also found evidence that I can see it.
Researchers also looked at which analysts are most versed in predicting future ESG risks. Counterintuitively, it doesn’t seem to be the most experienced or rated “All Star”. Institutional investor, is a financial journal and research institute with widely recognized analyst awards. In fact, the researchers’ results show that analysts without All-Star status made recommendations that better predicted ESG incidents. The same was true for those with less experience.
“Foreseeing ESG incidents may require a different skill set,” the researchers wrote. because they are used and comfortable in their roles and may be less inclined to innovate.”
fill the gap
As interest in ESG investing continues to grow, the question of whose ESG analysis to rely on becomes increasingly important.
“Our findings show that analysts know companies inside out and are likely to have the most useful insights in using company ESG disclosures,” said Yoon. I will explain.
Financial analysts are familiar with their companies and industries, so they have a unique ability to determine whether a particular company’s disclosures are useful, he adds.
“This is the type of insight that these analysts are likely incorporating into their models,” he says. “They have company-specific insights and information that help bridge the gap between the non-financial nature of ESG and company-level results.
