Blockchain and ESG are the two macro-topics that are defining future developments in the world of finance - topics that were the focus of the tenth Lugano Finance Forum on November 16 at the Palazzo dei Congressi in Lugano. USI finance professors Laurent Frésard and Eric Nowak took part in two panel discussions on ESG in particular, offering their research perspectives in dialogue with practitioners.
"Alternative" data for better financial analysis
ESG (Environmental, Social, and Corporate Governance) are criteria used in the financial analysis of firms. In the world of asset management they have become dominant factors for professional investors, such as investment fund or pension fund managers, in determining investment choices. However, these choices are made on the basis of financial analyses that are typically based on available data, such as market data (stock prices) or those provided in annual reports. However, this data tends to be backward looking and does not consider ’soft’ factors such as reputational risk, gender balance, environmental impact, business climate, etc., which are needed to get a more comprensive view of a company’s performance, i.e. from a ESG perspective. "For some time now academics have been studying so-called ’alternative data’, information that is not provided by the companies themselves but through specialised firms, and which therefore offer greater transparency on their activities, thus enabling a more comprehensive financial analysis," explained Prof. Frésard to the audience onsite and online. "This specialised information allows financial analysts to increase the accuracy of their analyses, especially short-term, and investors to establish the overall sustainability of a company, beyond mere financial returns. Among other things, more accurate analyses can help to identify attempts at greenwashing, which are unfortunately still widespread".
ESG vs. non-ESG investments
At the panel discussion on impact investing, Prof. Nowak discussed three ’inconveinent truths’ related to sustainable investing. "Our research shows that investments in ESG financial products do not necessarily perform better than non-ESG investments. Those who invest according to sustainability criteria therefore have to accept somewhat lower returns, but it is also true that conscientious investors generally agree with this. In addition, we observe that many products that claim to pursue ESG criteria are in fact only focused on one or at most two criteria, never on all three. This is understandable, however, if one considers the strong interdependencies between these criteria, which means that a greater focus on, for example, good corporate governance - the ’G’ - will not necessarily translate into a better impact of the company’s activities on the environment - the ’E’. But the good news is that now more than ever, investors can make informed choices and decide to invest more conscientiously - in the long run, this will lead the company to achieve sustainability goals such as, for example, de-carbonising the economy or curbin uncontrolled deforestation".
Prof. Nowak has recently created the Center for Climate Finance and Sustainability (CCFS) at the USI Institute of Finance, to provide high-level research that addresses one of the world’s most pressing problems, climate change, from the perspective of finance.
On the subject of ESG in finance, Prof. Nowak was recently interviewed by Finanz und Wirtschaft (see attached).