A primary challenge of integrating ESG factors into investment analysis is identifying and obtaining information that is relevant, comparable, and decision-useful.

ESG information and metrics are inconsistently reported by companies, and such disclosure is voluntary, which provides additional challenges for analysts.

Materiality and Investment Horizon

In an ESG context, materiality typically refers to ESG-related issues that are expected to affect a company's operations or financial performance and the valuation of its securities. When deciding which ESG factors to consider in their analysis, analysts should consider their investment horizon. Long-term ESG issues may have a negligible impact on the valuation of securities if the firm or client the analyst works for has a short-term investment horizon.

Relevant ESG-Related Factors

Corporate governance considerations, such as the structure of the board of directors, tend to be reasonably consistent across most companies. In contrast, environmental and social considerations often differ greatly.

Analysts typically use three main sources of information to identify a company's (or industry's) ESG factors that affect a company's industry before identifying its specific ESG opportunities and risks.

• Proprietary research. analysts will use their firm's tools or judgment to identify ESG information by researching industry associations, environmental groups, and news reports.
• Ratings and analysis from ESG data providers. This involves the use of data from ESG data vendors such as Sustainalytics. The analysts' information is presented in individual ESG analyses, scores, and ranking for each company in the vendor's universe.
• Research from not-for-profit industry organizations and initiatives. They include the Global Reporting Initiative.

Equity vs. Fixed Income Security Analysis

The use of ESG integration will differ for debt and equity analysis. In fixed income analysis, ESG is used to alleviate downside risk, while for equity analysis, the ESG integration alleviates downside risk and finds potential opportunities.

ESG integration also differs between fixed income and equity regarding valuation. ESG-related factors are often overanalyzed while doing equity security analysis. Credit analysis, relative credit ranking, forecasting financial ratios, and internal credit assessment are all used to integrate ESG factors.