ESG Integration Case Studies (SASB Edition)

1. ESG Integration Case Studies
SASB Edition
Nawar Alsaadi, FSA, SIPC

2. ESG Integration Case Studies (SASB Edition)
This presentation covers a host of ESG integration case studies and methodologies using the SASB standard.
The content of the presentation stems from a collection of ESG integration papers provided by SASB from
2016 to 2020 (link).
Asset Manager ESG Integration Topic
TEMASEK Climate Analysis
Neuberger Berman SASB in Japanese Small/Mid-Cap Companies
Glenmede Investment Management The Value of ESG Momentum Strategies
Columbia Threadneedle Investments CTI Responsible Investment Rating
State Street Global Advisors R-Factor™
BlueSky Investment Management The Evolution of Value Investing
Nordea Asset Management ESG Integration in Emerging Markets
Terra Alpha Investment General Mills
UBS Asset Management Material ESG Factors
Wafra (Constellation Platform) Bonus Case! SASB in Private Equity
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The ESG Integration Medal is awarded to those entities with
the most innovative ESG integration approach.

3. TEMASEK 1/2
From V1.0 to V2.0
The ESG integration framework “V1.0” spans the entire investment process:
origination of potential opportunities, evaluation and approval of new
investments, and monitoring and stewardship of the portfolio across all asset
classes.
Within the ESG integration framework, Temasek’s investment teams consider
sustainability-related factors alongside commercial considerations and evaluate
how these may impact a company’s long-term ability to generate sustainable
returns or impact its reputation. Leveraging this understanding, the ESG team
has developed a customized tool that incorporates the SASB Materiality Map®
and licenses the SASB IP since early 2019. The tool supports the investment
teams in their ESG analysis for both public and private companies. It helps them
identify the ESG issues most likely to be financially material for the companies
they are evaluating, the questions and issues they can raise with management
of those companies, and opportunities to add value and collaborate with
portfolio companies on their journey of sustainability post-investment.
In the early part of 2020, the ESG team launched an updated version of its
integration framework, a.k.a. ESG V2.0, which builds on and improves the
existing methodology and tools. Temasek’s V2.0 framework reinforces a strong
connection with the existing investor and corporate knowledge accumulated by
SASB on how sustainability issues impact companies’ operating environment
and financial position. The new framework also places stronger emphasis on
post-investment action plans and engagement. The risk and opportunity
assessment of material issues presents the investment teams with constructive
avenues for engagement and value creation to work with portfolio companies in
the evolution of their sustainability practices.
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An expanded approach to climate analysis was introduced in V2.0 of the ESG
integration framework. The analysis is mandatory for all new investments
brought to evaluation by Temasek Investment Committee. It examines climate
impact from several perspectives: (a) the potential investee company’s
contribution to climate change through its carbon footprint; (b) the impact of
climate change from physical and transition risk perspectives, and (c) any
potential new opportunities arising from technology innovations as well as
evolving customer needs.
A range of absolute and relative metrics is employed in the analysis and
contributes to the evaluation of climate considerations and investment
decision-making. These metrics include total carbon emissions and ratios such
as carbon intensity and carbon efficiency, which allow Temasek to assess the
impact of the new investment on portfolio targets. In addition, the investment
teams conduct an annual climate risk analysis as part of the ongoing asset-level
reviews within their coverage. As part of Temasek decarbonization goals, they
are also stepping up their engagement efforts with portfolio companies and
increasing the allocation of capital to a broad range of decarbonization
solutions.
As part of its climate strategy and ambition to reduce carbon emissions, both
for its operations and portfolio, Temasek is evaluating additional tools, such as
the introduction of an internal carbon price for its corporate and investment
activities.
“Temasek’s investment teams consider sustainability-related
factors alongside commercial considerations and evaluate how
these may impact a company’s long-term ability to generate
sustainable returns or impact its reputation.”
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Embedding climate analysis in V2.0
Climate ESG Integration

4. TEMASEK 2/2
Example: Automotive Co
Automotive Co. is a large, publicly listed company in emerging markets with a
leading market share in the passenger vehicle segment. The company has a
broad product portfolio ranging from compact entry-level cars to luxury sedans.
It operates manufacturing plants located in the country of domicile. Most of the
electricity used in the manufacturing process is generated by the company’s
own gas-based captive power plants and very little is directly consumed from
the grid.
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Embedding climate analysis in V2.0
At the second step of the analysis, the investment teams calculate key
carbon metrics, allowing us, as an investor, to better understand the carbon
profile of the company, how it compares with companies in the current
investment portfolio, and how this new investment could affect portfolio
targets. This would include ratios such as:
Apportioned emissions: measures the contribution that this investment will
make to total portfolio emissions based on the equity stake and total Scope 1
and 2 emissions of the company. • Carbon intensity: helps to evaluate
whether the investment will have accretive or dilutive impact on the
portfolio carbon intensity, measured as equity-adjusted tons of CO2 divided
by the market value of the equity stake. • Carbon spread: is a customised
Temasek metric which is added to the overall spread requirement on the
investment, which reflects currently unpriced carbon cost. It is calculated as
the company’s current emissions multiplied by a predefined carbon price,
divided by the target’s market value2 . Carbon spread is still in the pilot stage
of its introduction, yet serves to create a heightened awareness among
investment teams of the potential impact of a company’s GHG emissions to
its value, while connecting that with financial return projections.
As a first step in the analysis, the investment teams look to evaluate the type
and nature of emissions across the full automotive value chain. That level of
understanding serves as a critical element in evaluating other materially
relevant impacts and levers in a company’s operations and strategy. Analysis
of Scope 1 and 2 emissions should be completed by the deal teams for all
new investment opportunities, with evaluation of Scope 3 emissions included
for companies and sectors for which it is financially material.
As a next step, the investment teams look to compare the carbon
performance of the company relative to its peers using metrics such as
carbon efficiency. Carbon efficiency can be expressed in unit of dollars
revenue or in the case of automotive manufacturers, tCO2e per vehicle
produced.
To build a more comprehensive understanding of the climate-related risks and opportunities in an industry such as the automotive sector, it is important to also
assess the emissions arising from the use phase of the final product. For vehicle manufacturers, government regulations, market infrastructure, and the growth of
the electric vehicles market have significant influence in reshaping the market. Understanding how a company’s product portfolio is positioned in the face of such
trends and changes, and how well its strategy is aligned, are critical elements of future value.
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Climate ESG Integration

5. Neuberger Berman 1/3
Japan Equity Engagement Investment Strategy
The objective of the Japan Equity Engagement Investment Strategy at
Neuberger Berman is to seek long-term outperformance versus the benchmark
by investing in “hidden gem” companies and to encourage their sustainability
transformation through engagement. To realize this goal, ESG considerations are
integrated throughout the investment process: starting with universe-level
screening, followed by company-level due diligence, and finally the scoring
system that ultimately helps determine the company’s weighting in the
portfolio. Once initiated, the team will continue to maintain close monitoring of
the business fundamentals, valuations and the sustainability profile of the
company. These factors are inextricably linked and for this reason the
responsibility of the strategy’s ESG analysis and engagement, including proxy
voting, rests on the investment team and not on a separate entity such as a
stewardship or responsible investing team. This ensures that their engagement
on material ESG issues are linked to factors that move the needle specifically for
the business and ultimately performance of the portfolio.
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NB takes a two-pillar approach to integrating ESG into their investment process. The first pillar focuses on financially material E and S issues and the second is
dedicated to G. The reason they separate these two is because their methods of analyzing and evaluating these issues are fundamentally different. SASB’s
materiality framework plays a key role in helping them identify the sustainability factors that they believe could positively or negatively affect their investment
thesis of the company during their long-term investment horizon. Hence, in their first step to analyze E and S, they reference SASB’s Materiality Map® to identify
the key issues within the industry or sector. In the second step, the lead portfolio manager (PM) or analyst will scrutinize these issues with respect to the business
model, value chain, growth phase of the company, and competitive position to highlight high-priority issues that need to be addressed immediately. This is done
through on-the-ground research combing through years of publicly available company disclosure and through meetings with the company, competitors, suppliers,
clients, and external research providers if available. During this process, They leverage NB’s ESG team and their proprietary Materiality Matrix as a sounding board
to ensure consistency across their assessment. The third step is team evaluation and scoring. Their focus is on how far the company is in mitigating the financially
material issues it faces. These scores are then incorporated into the E, S, and G components of their scoring model, which ultimately helps determine the weight of
the portfolio holding.
Integrating SASB Standards into Japanese small
to mid-cap public equity strategies
ESG Integration Process

6. Neuberger Berman 2/3
Engagement Process
Once the company has been initiated in their portfolio, NB will set an
engagement objective and a customized strategy to address the financially
material ESG issues they have identified. Their experience engaging companies
has shown that smaller companies require more time and resources to address
these issues (average 2-3 years for E and S issues). Hence, given the relatively
lengthy process, they have adopted a milestone system to ensure their
engagement remains on track to achieve the objective. The system has five
stages, beginning with their assessment of the material ESG issues to the
company fully integrating all the issues addressed. Based on past engagements,
companies have historically tended to face the biggest hurdles overcoming
Milestones 3 (acknowledgement and commitment) and 4 (implementation of
an action plan). Key reasons include internal opposition over resource allocation
and concerns over public image if the firm is unable to achieve its key
performance indicators. In their view, many of these concerns are based on
outmoded perceptions of corporate social responsibility (CSR) activities (i.e., the
perception that ESG activities are unrelated to the business) and short-termism
on the part of middle-management. As a result, NB’s team places great
emphasis on Milestone 2 (presentation of their “case” to the company). In this
crucial step, they aim to clear away some of these misconceptions and draw a
roadmap on how they believe addressing these material issues can ultimately
contribute to the long-term sustainability of the business and consequently
their portfolio’s performance. In this process, they make it a point to meet with
senior executives who are the decision-makers within the firm. Based on their
previous engagements, the most successful mitigation of ESG issues has come
from companies with leadership that is committed to addressing these issues.
In the presentation deck used at this phase of engagement, they make a clear
distinction between ESG and CSR by referencing the SASB materiality
framework and they own proprietary research that links specific material issues
with the fundamentals of the business. 6
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They also present the importance of a materiality analysis to create a list of
priority issues to tackle first to maximize the limited resources at their disposal.
Finally, they also describe in detail how these factors are woven into their scoring
model and investment decision-making process as a message to the company that
their long-term interests are closely aligned with management and the successful
integration of sustainability into their business model. This is usually the “a-ha”
moment of the meeting.
Integrating SASB Standards into Japanese small
to mid-cap public equity strategies
“They also describe in detail how these factors are woven into their
scoring model and investment decision-making process as a
message to the company that their long-term interests are closely
aligned with management and the successful integration of
sustainability into their business model. This is usually the “a-ha”
moment of the meeting”
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7. Neuberger Berman 3/3
Engaging with Company A on IT Systems Resilience
Company A provides sales promotion services to e-commerce sites and in
recent years has enjoyed robust growth as a result of the explosive growth of
online gross merchandising volume (especially during the COVID-19 pandemic).
On the other hand, while the business continued to grow at an accelerated
pace, they felt that the company’s sustainability profile had not evolved in
accordance with that speed. Leveraging the SASB materiality framework and
their own proprietary materiality matrix, the lead PM analyzed the range of
material issues affecting the company based on fundamental bottom-up
research and interviews with the company as well as cross-checks with
competitors. Based on this analysis, the key issues they identified were:
1) Resilience of the IT systems platform.
2) Employee and management-level gender diversity.
One of the challenges within this firm was getting senior members to
understand and embrace the concept of sustainability and how it pertains to
the business’ long-term sustainable growth. Hence, for this meeting, they
invited not just the Director and CFO but also the executive officers in charge of
corporate planning who would ultimately be responsible for addressing these
issues to speak with them.
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The company provides sales promotion services to e-commerce sites and
therefore is exposed to operational risks from potential data and systems
breaches. Hence, in NB’s review of the materiality of this issue for their business,
they raised the fact that the company lacked disclosure on how these risks were
being mitigated and highlighted the importance of appointing a management-
level executive to oversee firm-wide cybersecurity initiatives. To illustrate this
point, they provided examples of other portfolio companies within the sector that
make best-in-class disclosures, including how the companies managed past
breaches as well as internal stress testing and audits of software vendors. Then
they explained in detail how this information helped them as investors to better
understand the way these risks were being managed and consequently resulted in
improved E and S scores and ultimately a higher model weight within their
portfolio.
Integrating SASB Standards into Japanese small
to mid-cap public equity strategies
On gender diversity, NB commended the company’s decision to appoint a female
executive officer as a key step to creating female role models within the firm. As a
next step, they suggested that the company consider formulating a basic policy on
gender diversity that focuses on providing a working environment that supports
female employees as well as setting up an evaluation system to promote more
female managers to management-level positions. They also suggested that the
company consider undertaking a comprehensive assessment of its board
members’ skillsets and appoint internal or external female executives in areas
currently not covered by existing directors. They explained that a diversified
boardroom would represent the interests of all stakeholders of the business and
would help to foster more dynamic discussions about the company’s long-term
vision and strategy, which is core to managing a successful and sustainable
business in the long-run. After the presentation, the senior managers who
attended the meeting said they now had much better insight on why these issues
were pertinent to long-term investors and the sustainability of the business.
Case Study: Company A (IT Services)
Engaging with Company A on Diversity
In the 2020 GPIF survey of listed companies, 43 percent of respondents said
they have been approached by an engagement or activist fund, of which 85
percent said they had agreed to meet the investors. However, the majority
of these meetings were focused solely on business fundamentals, strategy,
and capital management, while only 10 percent covered topics related to
ESG and sustainability pertinent to the business. A purely ESG meeting was a
mere 2.2 percent. Hence, it is NB’s view that investors, especially those with
a long-term view, may have a bigger role to play by integrating material ESG
issues into their investment strategies, helping enhance the sustainability of
portfolio companies and ultimately generating alpha over the long-term.

8. Glenmede Investment Management
ESG Momentum Strategy
ESG Momentum, an investment factor that identifies stocks with an improving
ESG footprint over the prior 12 months, is emerging as a strong and differentiated
input for a broader set of investment models. The potential strength of ESG
Momentum as an investment factor makes it relevant for general stock
selection—a use that goes well beyond thematic impact investing models. GIM
believes the factor shows an ability to produce annualized excess returns
comparable to traditional characteristics, such as valuation metrics, fundamental
ratios, and earnings signals for U.S. equity investors. In addition, their research
suggests ESG Momentum results are uncorrelated to other factors, which could
improve a portfolio’s risk-return profile.
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In calculating ESG Momentum, GIM took the change in ESG scores on a
monthly basis (Based on MSCI Data – SASB Materiality Map) from ratings
12 months prior for all constituents in the Russell 1000 Index. This created a
factor comparable to Price Momentum, which has become a commonly
accepted standard in the investment community. The equal-weighted top
quintile of ESG Momentum was tested on its own and versus an equal-
weighted combination of Price/ Earnings, ROE, EPS Estimate Revisions, and
12-Month Price Momentum. GIM analysis indicates that ESG Momentum
has the potential to merit use across mainstream investment models, not
just in those specifically designed for impact investing. The top quintile of
ESG Momentum delivered an annualized excess return of 1.6 percent above
the equal-weighted index over the past nine years (12/31/2009-
12/31/2018). The seemingly low correlation of ESG Momentum with other
factors also underscores its additive potential to general investment
models. ESG Momentum had a near-zero correlation with the average stock
selection factor in their Russell 1000 constituent library, which includes
valuation metrics, fundamental ratios, earnings revision signals, and
technical indicators.
The Value of ESG Momentum
Calculating ESG Momentum
GIM’s internal research shows ESG Momentum could have performed
better than a set of representative factors since 2010 as detailed above.
The chart shows that the ESG Momentum factor they calculated had a
return of 14.6 percent versus the actual Russell 1000 return of 13.3
percent. At the same time, portfolio risk, measured by standard deviation,
was lower for the ESG Momentum factor compared to Momentum, EPS
estimates, and P/E.

9. Identify & Manage Risks Engaging Low ESG Rated Companies
RI Rating Approach
Columbia Threadneedle Investments
Across their mainstream strategies in equities and corporate fixed income, CTI
has worked to integrate ESG data to identify and manage risks and, ultimately,
enhance investment returns. The focus of the firm’s ESG research approach is to
understand companies’ exposure to and management of material ESG factors,
which may impact a company’s business model and financial performance. CTI
believes this allows us to develop actionable research insights into non-financial
risks and opportunities that are additive to their fundamental financial insights.
Applying a materiality lens—such as that established by the Sustainability
Accounting Standards Board (SASB)— enhances their ratings models and their
deep-dive research by allowing them to focus on the key ESG performance
factors, industry by industry, that matter most.
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CTI RI ratings approach is comprised of two separate models. The first builds on
proven academic models that have demonstrated their reliability as strong
indicators of companies’ financial stewardship—effectively a proxy for financial
prudence. They call this the CTI Financial Stewardship Model. The CTI Financial
Stewardship Model is paired with a second model focused on the financial
materiality of ESG factors. This model references the codified SASB standards
and materiality framework, to which they mapped data to measure and monitor
company performance. They call this second model the CTI ESG Materiality
Model. The interaction of the CTI Financial Stewardship Model and the CTI ESG
Materiality Model yields a rating that they refer to as the CTI Responsible
Investment Rating. The CTI RI Rating Model assigns a 1-5 rating to nearly 6,000
companies around the globe, with 1 signifying “high quality” and 5 “low quality.”
Their analysts and portfolio managers access the CTI RI Ratings through cloud-
based, interactive dashboards that feature enhanced analytics and visualization
tools to deepen their insights and inform investment decisions. The CTI RI
Ratings provide an added signal that helps to form a more complete and
systematic review of a company’s holistic risk and opportunity profile.
CTI recently analyzed the persistent low-quality (5-rated) companies in their universe of
nearly 6,000 rated companies, and they took a special interest in the companies that
most consistently, or for the longest duration, exhibited weak scores. This analysis
allowed them to isolate and better understand the dynamics and contributing factors to
the low rating, and simultaneously gain insight into how low-quality companies can
become high-quality companies.
Statistically speaking, because the greatest alpha opportunity is turning a low-quality (5-
rated) company into a high-quality (1-rated) company, there is ample incentive to
explore low-rated companies and fully understand these characteristics. CTI
engagement conversations first focus on gauging management’s awareness of the issues
SASB research has identified for companies in that industry.
Management’s response to their questions can be very telling: if the company is aware
of the material issues, they engage in a discussion and encourage them to articulate
how they think about those issues (regardless of whether they are a risk or an
opportunity) and how they mitigate the identified risk or leverage the opportunity.
Conversely, if a company is unaware of the materiality of the identified issue(s), or if
they cannot adequately articulate how they view the issue, they point them to SASB’s
Materiality Map and the SASB standards applicable to their industry. Their engagement
discussions may in some cases exclusively focus on data gaps identified in their CTI RI
ratings model, situations in which no data is available from a company that they can
connect to an issue identified by SASB as likely to be financially material. While some
investors may view such gaps as problematic for their analyses, they view them as an
opportunity to engage with companies and inquire about and educate on key ESG
issues. In several instances, their inquiries have raised awareness about financial
materiality among company managers who have agreed to enhance their disclosures.
CTI Responsible Investment
Rating

10. ESG & Fiduciary Duties Anatomy of an R-Factor™ Score
Building R-Factor™
State Street Global Advisors
At State Street Global Advisors, they believe that environmental, social and
governance (ESG) issues can impact a company’s ability to generate long-term
sustainable performance. Consequently, they see the consideration of ESG issues
as part of their fiduciary duty to clients.
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In late 2017, SSGA began working with SASB to design and build an ESG scoring
system that could address the ESG infrastructure challenge and bring about
more sustainable markets. Because they see ESG as part of their Fiduciary
Responsibility, they called the scoring system “R-Factor™.” To address the
existing challenges around ESG data, they designed the score with four
foundational pillars:
• Focus on financial materiality: Companies would be scored based only on the
issues that matter most for their business.
• Build from commonly accepted, transparent materiality frameworks: They
leveraged SASB so that companies and investors clearly understood what the
scores are based on.
• Multiple data sources: To increase coverage and minimize the bias of any one
provider, they drew on the raw metrics of four different ESG data providers,
mapping them to transparent materiality frameworks, including SASB.
• Integration with stewardship: The scores inform their voting and engagement.
By providing companies with their R-Factor™ scores, they offer a roadmap for
how to improve management and disclosure of the sustainability issues that
matter most.
Together, the R-Factor™ score offers a view of how well a company manages its
ESG issues, those that have a direct link to business performance, and are within
a company’s control.
R-Factor™ has two sub-components: ESG and Corporate Governance. They designed it
this way to reflect the full set of sustainability risks and opportunities facing companies,
and the reality that they need to be treated differently. ESG issues are market-agnostic
and industry-specific: The effects of climate change do not stop at geographical borders
but are likely to affect a consumer goods company differently than an oil company. In
contrast, traditional corporate governance issues—things like executive compensation,
shareholder rights, and board accountability—are the opposite: market specific and
industry-agnostic. The business practices, governance structures, and market
expectations of firms vary widely across regions, and SSGA believes it is important to
hold companies to the standards appropriate to their market. R-Factor™ takes these
nuances into account.
R-Factor™: Leveraging SASB to Build Sustainable
Capital Markets
Putting R-Factor™ To Use
Stewardship: They screen companies for voting and engagement based on R-Factor™
scores. They also disclose companies’ R-Factor™ scores to them, both during
engagements and on request. This gives boards and management teams a roadmap for
the specific ESG issues they should be focused on managing and disclosing to investors,
and how to do so.
Investment Solutions: R-Factor™ has been shared with all of their investment teams
across equity and fixed income, both active and index. While teams are integrating R-
Factor™ into investment solutions in a variety of ways, depending on specific
investment styles, the score represents one firm-wide view on ESG.
Client Reporting: Building sustainable capital markets also requires investors to develop
a deeper understanding of which ESG issues are financially material to their portfolio
companies

11. ESG & Value Investing
ESG Integration Methodology
BlueSky Investment Management 1/2
BlueSky is unique as an ESG integrated fundamental value firm with global,
international, and US strategies. As value investors, BlueSky believes the key to
long-term investment success is their ability to identify and purchase companies
that trade at significant discounts to their intrinsic value and sell these
investments when intrinsic value is realized. From their perspective, integration
of carefully selected and financially material ESG factors represents a significant
opportunity to evolve and improve upon traditional value investing techniques.
In determining a company’s intrinsic value, fundamental value investors have
traditionally focused on ROIC, free cash flow, strength of balance sheet, margins,
competitive advantages/moats, and management team quality. Including
analysis of material ESG issues that may affect a company’s intrinsic value can
strengthen the fundamental value investing framework.
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BlueSky developed a proprietary ESG evaluation framework designed to drive
alpha and better manage risk. They created over 40 unique ESG Roadmaps™
comprised of material ESG factors unique to each sector and region. They then
ranked companies based on a composite score of empirically selected material
factors sourced from corporate disclosures, specialized datasets, and other
publicly filed information. This process allowed them to integrate only financially
material ESG data that adds value to their process, while ignoring vast amounts
of data that was financially immaterial. During the initial phase of their
investment process, companies identified by their value screens are evaluated
through their proprietary quantitative ESG framework, which ranks each
company’s ESG performance on financially material issues by sector. Utilizing
these screened results, the firm concentrates on the most attractive three
deciles (30%) of companies for portfolio inclusion. They then screen for quality
to further narrow portfolio candidates, considering, among other factors,
balance sheet strength, operating efficiency and profitability
The Evolution of Value Investing

12. Energy management in manufacturing
Case Study: Howdens Joinery Group
Howdens Joinery Group SASB Material Topics Findings
BlueSky Investment Management 2/2
Howdens Joinery Group Plc is one of the largest integrated suppliers of kitchens
and joinery products in the United Kingdom. Founded in Yorkshire in 1995 under
the name Galiform Plc, the company originally operated as a successful business
unit within MFI Industries. Following a restructuring, MFI sold its unprofitable
retail businesses to focus on the more profitable Galiform, and the company was
renamed Howdens Joinery in 2010. From an ESG perspective, there was limited
coverage of Howdens across the material ESG data in BlueSky’s proprietary
quantitative model. Had their approach relied solely on ESG data, they would not
have been able to continue with their analysis. However, because their process
utilizes both data and a qualitative ESG assessment, they were able to move
forward with their research. They began analyzing the company’s performance
across material topics identified in SASB’s SICS classification for Building Products
& Furnishings (Consumer Goods Sector).
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The Evolution of Value Investing
Howdens Joinery has been certified by the Carbon Trust Standard for several
years in recognition of their success in reducing overall energy usage and their
commitment to continued reductions. The company reduced its carbon
footprint (tCO2 e per £m) by 13.4% from 2014 to 2016. Over this time period,
the company’s total scope 1 and scope 2 emissions have remained relatively
flat while revenues increased by 19.8%.
The company follows a number of regulatory guidelines and processes to
ensure safety of workers and consumers of its products. Howdens’ internal
process is governed by the Control of Substances Hazardous to Health
(COSHH) Regulations 2002.
Management of chemicals in products
The company has been successful in reducing waste in its manufacturing process
through the implementation of newer machinery and the use of software
technology. They have worked with suppliers to manufacture custom-sized
chipboard in order to ensure minimal waste in production. The company realized
an opportunity to use the sawdust waste as an energy source and installed
efficient biomass boilers at their two manufacturing sites in 2015.
Product lifecycle environmental impacts
Over 75% of Howdens’ products are wood or wood-based, and the company
sources 100% of wood-based materials from FSC (Forest Stewardship Council)
certified sources. FSC is a non-profit organization setting what is widely
considered to be the gold standard for responsible forest management and
wood sourcing.
Wood sourcing
BlueSky found that much of SASB’s industry standards to be applicable in
analyzing European companies. However, within a global context, BlueSky has
observed regional and cultural differences that required them to create
customized ESG Roadmaps™ that incorporate only those ESG factors that are
uniquely correlated to financial performance in that particular region. For
example, they found very little materiality across social factors in Japan, while
certain environmental and governance factors remain important there. Their
quantitative research found social factors such as supply chain management,
workplace satisfaction, human capital development, and employee retention to
have no correlation to increased ROIC or share performance, while these same
factors showed more significant correlations to increased ROIC in both the US
and Europe.
SASB in a Global Context

13. ESG Factors Are Core To Nordea’s Investment Process
Emerging Stars Equity Fund
Nordea Asset Management 1/3
Nordea includes ESG considerations in their investment analyses, decision-making processes, and ownership policies and practices. They believe that incorporating ESG
factors in their investment activities can safeguard shareholder value and enhance long-term returns. This is supported by growing bodies of industry and academic research
correlating ESG performance to corporate financial performance and improved shareholder returns. Considering material ESG issues in their investment decisions is a part of
their fiduciary duty to their clients; being ESG proactive is reflected in their mission statement.
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Nordea Asset Management launched the Nordea 1 Emerging
Stars Equity Fund in April 2011, with the aim of creating a unique
emerging market equity fund in which fundamental strategy and
valuation analysis in portfolio stock selection fully integrates ESG
factors. Rather than utilising a “first-generation” approach to
ESG considerations, i.e., utilising a “negative screen” to avoid
certain companies and sectors, they wanted to take a positive,
“second-generation” approach, in which ESG analysis could add
value to the investment case. They recognised a number of key
factors as they developed this portfolio:
1. Important information which could have a material impact
on companies in emerging markets was not discernible via
the traditional data sets used in conventional investment
analysis.
2. While emerging markets are typically considered to carry
higher risk, favourable structural growth dynamics in certain
markets have the potential to interact strongly with
company-level ESG factors and thus, present significant
return opportunities in these markets.
3. Engaging with companies to improve management of
material ESG issues could be an additional lever to unlock
value if a company’s cash flow was being overly discounted
due to either poor reporting or poor management of ESG
factors.
ESG Integration in Emerging Markets

14. ESG & EVA
Fade Rate
Nordea Asset Management 2/3
Nordea believes that, when Economic Value Added (EVA)—the incremental difference in the rate of return over a company’s cost of capital—is not properly priced by
the market, excess shareholder value can be generated. Companies now operate against a backdrop of mounting operational complexity, characterized by
unprecedented wealth transfers, shifting demographic and political landscapes, rising emerging-market competitiveness, and disruptive technologies, among other
things. In this context, Nordea believes that an approach to securities selection focused solely on long-term EVA is no longer adequate to generating alpha for their
clients. Complementing traditional investment analysis with ESG enquiry is necessary to understand how these issues—which tend to be excluded from conventional
investor-focused communication—affect the ability of companies to grow and create shareholder value.
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They believe integration of ESG information in competitive advantage analysis (e.g., impact to cost structure, risk factors, etc.) and into the valuation for their explicit
forecast period differentiates their process from that of others. Investment time horizon and longer-term forecasting capabilities are important components of this
process; ESG data holds information critical to understanding how companies are positioned to manage longer-term risks. This is explicitly incorporated in Nordea’s
valuation framework through the setting of their “fade rate” for the company. The fade rate describes the share of the excess return the company generates, which they
view as sustainable in the longer-term. In general they view companies’ competitive advantages as eroding over time, resulting in declining excess returns. However, with
the integration of the ESG aspect, they allow companies with positive scores and thus stronger competitive advantages to maintain a higher ROIC premium in the longer
term.
ESG Integration in Emerging Markets
Nordea’s proprietary ESG research approach attempts to identify stakeholder risks at the company level and is conducted from two perspectives. First, they assess
alignment (or misalignment) of business models in relation to global sustainability goals such as climate stability, resource scarcity, healthy ecosystems, basic needs,
wellbeing or decent work. Second, they evaluate a company’s ability to manage material ESG issues in relation to stakeholders, such as employees, suppliers, customers,
communities, regulators, or the environment. This involves assessing a company’s strategy and performance to address exposure to material ESG issues that could impact
its risk/reward profile or growth opportunities. Incorporating SASB Standards in their ESG analysis has enabled them not only to better assess and identify the financial
materiality of ESG issues, but also to identify the relevant indicators or data points that could reflect a company’s positioning on those issues. Utilizing SASB industry
standards along with country ESG risk indicators provides them with further granularity on materiality. Their proprietary ESG analysis is summarised in a company
scorecard comprising of five pillars, as displayed in Figure 2 (next slide). The business model and corporate governance pillars receive a fixed weight, whereas the three
remaining pillars – business ethics, environmental considerations and social issues – are variably weighted depending on the company risk exposure, financial impact, and
reputational risk. This results in a final rating ranging from A to C, and positive or negative momentum indicators, as displayed in Figure 3 (next slide). Their research
approach also allows them to identify areas of underperformance and then engage with companies in hopes of influencing them to address challenges and move in the
right direction.
Proprietary ESG Research Approach

15. On-Site Visits
Nordea Asset Management 3/3
To augment third-party ratings viewpoints, Nordea
implemented on-site visits as part of their ESG research
process through which their in-house analysts regularly meet
with management. Thus, they have developed assessments
of ESG performance for emerging markets issuers over time
that differ from those of third-party ESG ratings agencies.
Their active ownership and engagement activities not only
enhance corporate transparency, but have also benefited
from access to SASB Standards as engagement tools for
industries globally.
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ESG Integration in Emerging Markets

16. ESG First
Terra Alpha Investment
Terra Alpha’s investment process starts by filtering all global publicly-listed
companies down to those that are disclosing certain environmental metrics
(initially business greenhouse gas emissions). There are currently over 2,000
companies – for perspective, 81% of the S&P 500 – that are disclosing this data
in sustainability reports, up from 20% in 2011. The SASB standards play an
integral role in the next stage of their investment process. Within the
Environmental Productivity (EP) stage of their evaluation, they use the SASB
standards to examine the ESG factors that are deemed significant for each
industry. Specifically, the standards assist them in determining the weightings
for factors within their proprietary multi-variable, industry-specific EP measure,
which incorporates carbon efficiency, water efficiency, and material efficiency.
The most efficient companies in each sector, based on their EP measure,
advance to the fundamental assessment stage of the process.
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Case Study: General Mills
General Mills, Inc. is a U.S.-based company that manufactures and markets
branded and packaged consumer foods worldwide. The company also supplies
food products to the foodservice and commercial baking industries. The
company is a member of the Processed Foods industry within the SASB
Sustainable Industry Classification (SICS) framework and the Food Products
sector within the ICB sector classification system. SASB disclosure topics for
the Processed Foods Industry are: • Energy and Fleet Fuel Management •
Water Management • Food Safety • Health and Nutrition • Product Labeling
and Marketing • Packaging Lifecycle Management • Environmental and Social
Impacts of Ingredient Supply Chains. Based on SASB’s accounting metrics and
provided evidence, along with their own knowledge of the industry, Terra
Alpha tilts their factor weightings for the sector to overweight the water
efficiency and material efficiency measures. With their factor weightings
determined, their use General Mills’ disclosed environmental data to
determine Terra Alpha’s assessment of the company’s Environmental
Productivity.

17. Case Study Continued
Terra Alpha Investment
With its carbon efficiency measure in the top third of the sector, its water
efficiency in the top quartile of its sector, and its material efficiency around the
mid-point of its sector, General Mills’ Environmental Productivity is among the
best within the sector. The company, therefore, advances to the fundamental
assessment stage of Terra Alpha’s investment process. As a company
progresses from this initial step, in addition to verifying the environmental data
points, Terra Alpha collect additional pieces of information regarding the
company’s reporting standards and environmental targets, including: the year
the company began reporting on sustainability factors; the frameworks on
which disclosed metrics are associated (CDP Climate Change, CDP Water, etc.);
whether sustainability reports are assured by third-parties and if so, by whom;
whether the corporation has established sustainability goals or targets (e.g.
science-based or UN Sustainable Development Goals). General Mills is not only
a robust discloser of data, it has also set targets for reducing GHG emissions,
energy use, fuel use, water use, and solid waste generation. The company has
made significant progress in all of these categories and holds itself accountable
where progress has not reached targeted levels.
In the fundamental assessment stage, Terra Alpha includes dozens of factors
from various categories to analyze - e.g., strategy, management, business
quality, profitability, growth, debt ratings, corporate governance, etc. In
addition to these more traditional measures and metrics about the company’s
operations, SASB’s guidance on the Processed Foods Industry focuses their
analysis of the company to look more closely at the supply chain and its
product line in terms of material efficiency, emissions, human rights, and
healthy living, in addition to in its own operations, (including the extent to
which the company has received food safety violations or violations for non-
conformance with regulatory labeling codes as identified in the SASB
accounting metrics for the industry).
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General Mills

18. ESG Better Judgment & Superior Returns
UBS Asset Management
The integration of material sustainability factors in fundamental analysis, UBS believes, yields a more complete, holistic picture of a company that better informs
the investment process. They do not believe that consideration of these inputs pushes aside traditional finance. Rather, they believe that they are additive to
financial analysis, valuation discipline and other forms of well-accepted fundamental research in a way that is likely to result in better judgment and risk
management, leading to superior returns. In UBS’s view, companies that are skilled at marshaling all their assets, tangible and intangible, are more likely to: have
superior supply chains that drive brand equity and pricing, attract better employees that create new products and services, have better governance that protects
shareholders, and develop greater energy- and water-use efficiencies that expand margins.
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UBS’s holistic view of valuation includes non-financial
factors alongside financial factors examined in a traditional
valuation process. Only inputs and factors considered to
be material in nature – that is, only factors that could
cause the “reasonable investor” to change their capital
allocation decisions – are included in this process. Thus,
SASB’s focus on materiality and the industry specificity of
this focus has been very valuable to them. Specifically,
SASB metrics, or KPIs, for the disclosure of material ESG
factors and SASB’s Materiality Map™ have been important
to the development of their proprietary sustainability
database and sustainability ranking system, which is
integral to fundamental valuation portfolio construction.
This proprietary sustainability database, residing alongside
the UBS Global Equity Valuation System (GEVS), is used to
rank companies based on a scoring system tailored to
reflect UBS Asset Management views on sustainability
issues most likely to affect corporate performance.
Industry-specific weightings and data generate a company-
specific score that is scored into deciles with others in an
industry. This complements the fundamental analysis
results in the fully integrated idea generation and
investment process.
Material ESG Factors

19. Case Study: Apple & Its Supply Chain
UBS Asset Management
As active investors and owners of Apple stock in many strategies, when a series of articles detailing human issues in
Apple’s supply chain emerged in 2012,5 UBS Asset Management had to decide whether these issues could endanger
Apple’s business from both a financial and reputational perspective. The issues mentioned in the articles included
hazardous working conditions, excessive overtime, improper disposal of hazardous waste, falsified records, disregard
for worker’s health and seeming disregard for Apple’s supplier code of conduct and supplier responsibility reports.
After an internal discussion, UBS’s Sustainable Investor team decided that one way to assess the severity of the issue
was to treat Apple and its supply chain as if they were a single company. UBS recognized that this approach was not
actually how the company was structured but they reckoned that if they could gain insight on the severity of the issue
on the supply chain, they would have a sense of the effect on Apple’s products and brand equity. Although the
concept of materiality is not unique to SASB, the combination of the concept and a list of key performance indicators
(KPIs) in SASB standards helped guide their thinking and discussion. Apple’s supply chain is represented in the SASB
Materiality Map and SASB standards within the Technology and Communications sub-segment of Electronic
Manufacturing Services and ODM. The most relevant KPIs within Human Capital – those that have high financial
impact – are Labor relations, fair labor practices and employee health, safety and wellbeing. In addition, three other
categories are material but have lower impact: diversity and inclusion, compensation and benefits and recruitment,
development and retention. The connection between these categories and the parent company, Apple, is represented
by SASB disclosure metrics for the Hardware Industry: Material sourcing and Supply chain management. This helps
explain why UBS considered Apple and its external supply chain “as one”, because a fault in the supply chain would
create a material impact on the supply chain management factor, which, in turn could have meaningful effect on
product quality, brand perception and other significant intangible factors. These factors enable Apple to sell its
products for a premium. The SASB framework was very helpful in framing the discussion between UBS Asset
Management analysts, portfolio managers and the company. A list of questions for management and supply chain
executives based on SASB standards and the Materiality Map helped inform their analysis and led to the conclusion
that Apple was making significant steps to improve supply chain control and reduce the real and perceived risks to its
brand. UBS also concluded that their financial analysis could be supported by this analysis of sustainability risks and
opportunities, giving them increased confidence in their investment decision to hold the shares and add to their
overall position.
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Other Quick Examples
The list of environmental, social and
governance factors that follows
includes but a few examples drawn
from today’s markets of other “non-
financial” factors that have changed
the value creation prospects of public
companies, but for which
fundamental equity analysis does not
readily account: • Labor practices
(e.g., the collapse of the Rana Plaza
clothing factory in Bangladesh) •
Extreme weather (e.g. impacts of
flooding in Thailand on chip
manufacturers) • Drought (e.g., threat
of stranded bottling plant assets in
Kerala, India)
Material ESG Factors

20. ESG & EVA
Wafra (Constellation Platform)
Wafra developed Constellation’s ESG strategy in close
consultation with the Platform’s founders, resulting in a
methodology that reflects their shared values and vision.
Constellation takes a hands-on approach to ESG and views
its portfolio company investments as partnerships in which
it aims to educate, engage, and empower each investor
entrepreneur to adopt best-in-class ESG practices and build
long-term sustainable businesses. Constellation’s ESG
integration process has three consecutive steps, which
consider ESG factors before and after investing in each
portfolio company:
Wafra has relied on SASB’s guidance to develop an ESG
framework for Capital Constellation that seeks to be
specific to each sector in which the Platform invests, yet
flexible enough to adapt to fast-changing standards and
expectations in the responsible investing space. Its unique
structure is intended to enable the Platform to drive the
adoption of best practices for ESG integration among the
next generation of alternative asset managers and their
underlying investments. By working with each investor
entrepreneur to customize an ESG methodology, Wafra’s
Sustainable Investment team seeks to ensure that ESG
becomes not just a check-the-box exercise but an integral
component of each portfolio company’s investment
process.
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SASB in Private Equity
“No one portfolio company investment faces the same
risks and opportunities. Constellation’s ESG
methodology is customised by industry, size, and
geography”

21. Also In This ESG Integration Presentation Series
by Nawar Alsaadi:
21
Nawaralsaadi@gmail.com