Evolution Rather Than Revolution — Integration of ESG into the Fundamental Value Equity Investment Process

The Fundamental Value Equity team at State Street Global Advisors has a long history of ESG investing. The team has run a number of exclusion-based mandates since the 1980s, while our long-standing fundamental investment approach and governance activities involved implicit consideration of ESG issues across our broader suite of products. This paper explores the evolution of our process in a changing environment.

We have seen an explosion of interest in ESG issues in recent years. Increased awareness has been driven in part by the United Nations adoption of its Sustainable Development Goals in 2015 and the UN Paris Agreement which was signed in 2016. Across the globe, the heightened interest in ESG issues has helped shape the investment landscape. There have been significant flows of funds into products that have been branded as ‘green’, ‘sustainable’ or ‘ESG’. However, such terms can be thrown about with some abandon, which can make it difficult to compare companies and products. As a result, concerns about the process of ‘greenwashing’, the misleading of the public/investors about sustainability credentials, has grown.

The enhanced public interest in sustainability has also helped drive a raft of new regulation, particularly in Europe. For example, in March 2020, the European Union (EU) released an action plan for financing sustainable growth. This plan incorporated sustainability into the assessment of suitability of financial instruments. It also called for an EU classification system for sustainable activities, the ‘EU Taxonomy’. Although level 2 is still not finalized, the taxonomy was published in June 2020 and becomes effective on 1 Jan 2022 for climate change adaptation and mitigation. In June 2020, the US Department of Labor published proposals that aimed to clarify its position; that only financially material ESG issues should be factored into investment decisions.