Financial Materiality of ESG

Integration

Key Concepts

• Explain the concepts of the financial materiality of ESG integration,

double materiality, and dynamic materiality and how they relate to ESG
analysis, practices, and reporting.
• Explain different ESG megatrends, their systemic nature, and their
potential impact on companies and company practices.

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 Financial Materiality of Integrating ESG

• Reduced cost and increased efficiency

• Reduced risk of fines and state intervention
• Reduced negative externalities

Financial Materiality of Integrating ESG

• Improved ability to benefit from sustainability megatrends

• Emerging markets and urbanization
• Technological innovation
• Demographic changes and wealth inequality
• Climate change and resource scarcity
• Evolution of Materiality: From Static to Dynamic

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 Double Materiality

Challenges in Integrating ESG

• Before implementing ESG

• Perception of negative impact on financial performance
• Fiduciary duty prevents ESG
• Advice from advisers has not been supportive of products that
integrate ESG

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 Challenges in Integrating ESG

• After implementing ESG

• Lack of understanding of investment mandate and needs
• Resources for ESG are lacking or expensive
• Gap between marketing, commitment, and delivery of funds

Challenges in Integrating ESG

Analysis limited by corporate disclosure, varies in

Data Availability
quality and scope, no single standard

ESG data does not have short-term impact; focused on

Modeling
risk factors and less on positive ESG performance

Vary discount rate on future cash flows; higher/lower

Valuation
multiples to valuation ratios, risk of double-counting
Techniques

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 Challenges in Integrating ESG

• Greenwashing
• Misleading claims about environmental practices, performance,
or product

Financial Performance

• ESG factors may influence financial performance.

• Engagement can create value for both investors and companies.
• ESG issues can be financially material to companies’ performance
and alpha.
• There is a correlation between ESG performance and corporate
financial performance.

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