Emma Sjöström

Many investors and companies around the world now agree that sustainability can directly influence the evaluation of companies’ current and future financial performance. For this reason, it has become central to understand how sustainability—or environmental, social and governance (ESG) issues1 —can be integrated into financial analysis. This is a task not just for financial analysts, however, but also for the portfolio managers who buy such analysis from sell-side researchers, as well as the officers who handle investor relations at the listed companies that are the target of financial analysis and investment. It is therefore important to study the interaction between these three actor groups, in order to better understand the drivers of and challenges for integrating ESG issues into financial analysis. This report extends the results of a 2019 study by Swesif, Stockholm School of Economics (SSE) and the Stockholm Environment Institute (SEI) on the theme of integrating long-term perspectives into financial analysis.2 Both reports include all three actor groups. While the first study was survey-based, and addressed ESG only implicitly through its focus on long-term issues, this report provides more context by using interviews to document how the different actors view the integration of sustainability into their work. To this end, we draw on 30 interviews with Swedish financial actors: 10 from the sell-side, 10 from the buy-side and 10 from the corporate side.Our study makes four main contributions: • First, our study indicates that there has been a notable increase in sell-side analysts’ focus on sustainability in the past two years. We identify three major drivers of this change: investors’ growing interest in ESG issues, the EU taxonomy on sustainability activities, and the increased attention paid to and understanding of the financial relevance of ESG. • Second, while previous studies have emphasised that financial analysts’ short-termism may have spurred markets to overlook sustainability risks, we found that participants in our study did not view short-term pressures as a major impediment. They do however highlight the need to balance shortterm and long-term issues in order to better integrate ESG issues. The quarterly earnings call is a typical setting where companies often struggle to frame ESG issues in a financial context. • Third, quantifying ESG aspects is perceived as a major challenge when integrating ESG issues into financial analysis. Our results show that initial progress has been made as some financial actors do factor either ESG scores or materiality assessments into their financial valuations. The EU taxonomy and the harmonisation of other reporting standards are perceived as important tools for further supporting these advances. Many interviewees, however, insisted that there is also ample room for qualitative assessments of ESG issues in financial analysis. • Lastly, our findings highlight the importance of access to sufficient and high-quality ESG-related skills and resources. Most of our interviewees rely on an important variety of sources for ESG information, but largely learn how to make use of these sources “on the job”. We find that dedicated ESG teams and the involvement of companies’ sustainability officers provide important support, especially in the early phases of a learning curve.

Investors in financial securities are increasingly taking ethical, social and environmental matters into consideration in addition to the financial evaluation of potential and current investment objects. The number of ethical funds and sustainability indexes has increased explosively since the 1990s; in the early 1980s there were four ethical funds in Europe, today there are 313. The purpose of this paper is to identify and analyse actors involved in socially and environmentally responsible investing (SRI), and to identify, map and compare indexes and methods that currently are available on the SRI market.