Company Valuations are Increasingly Linked to ‘Intangibles,’ State Street Global Advisors

Wednesday, March 28, 2018 6:43 am EDT

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LONDON

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STT
"In the past, a successful company had to be financially sound and operationally excellent.Looking  ahead, we believe the most valuable and sustainable companies must also be ESG proficient"

LONDON, March 13, 2018 — State Street Global Advisors, the asset management arm of State Street Corporation (NYSE: STT), announced today the publication of its latest white paper, Harnessing ESG as an Alpha Source in Active Quantitative Equities. The report examines environmental, social and governance factors (ESG) as a source of alpha; and how ESG can be used as a measure of quality when evaluating stocks.

According to the paper, over the last half century, the composition of a firm’s value has shifted dramatically from tangible to intangible assets. Evidence suggests that the value of some intangible assets may be more sensitive to environmental, social and governance (ESG) issues, which increases the importance of integrating ESG factors into investment decision making. Interest in ESG is already on the rise thanks to a shifting economic landscape, in which the greatest global risks facing people, institutions and economies over the next decade may come from threats outside of purely financial categories; from climate change through to a company’s culture.

As such, the paper argues it is critical that all investment strategies currently centred on determining the value of, for example, physical assets and book value, are re-evaluated to reflect the increasing importance of intangible assets and non-traditional factors like ESG that influence value.

“In the past, a successful company had to be financially sound and operationally excellent.Looking  ahead, we believe the most valuable and sustainable companies must also be ESG proficient,” said Anna Lester, Senior Portfolio Manager, US Active Quantitative Equity at State Street Global Advisors.

Research1 shows most institutions (80 percent) have an ESG component as part of their investment strategies with more than two thirds (68 percent) stating that ESG integration has significantly improved returns; and we have also seen this reflected in our own flows, with our Emerging Market Enhanced SRI Fund exceeding $1.3bn in assets2.

Lester concluded, “Globally, how to capture the performance potential of ESG is an area of significant attention for asset managers and investors. Our Active Quantitative Equity team has developed a materiality map to do just this, incorporating an ESG factor that contributes to evaluating all stocks in their investable universe.”

Incorporating ESG analysis into a company’s evaluation can also provide unique considerations for that company’s prospects. For example, the report finds that firms with poor ESG scores are more likely to be involved in an organisational scandal or impropriety. While these types of incidents can directly affect a stock’s valuation, the opportunity cost may be greater than expected as management focuses on fixing problems rather than the long term growth prospects of the firm.

Read more in our Harnessing ESG as an Alpha Source in Active Quantitative Equities paper.

1 Performing for the Future, SSGA - April 2017(A survey of 475 institutional investors globally, conducted by Longitude Research

2 As of 7th February 2018

About State Street Global Advisors

For nearly four decades, State Street Global Advisors has been committed to helping our clients, and those who rely on them, achieve their investment objectives. We partner with many of the world’s largest, most sophisticated investors and financial intermediaries to help them reach their goals through a rigorous, research-driven investment process spanning both indexing and active disciplines. With trillions* in assets, our scale and global reach offer clients unrivaled access to markets, geographies and asset classes, and allow us to deliver thoughtful insights and innovative solutions.

State Street Global Advisors is the investment management arm of State Street Corporation.

* Please note that AUM totals are unaudited. AUM reflects approx. $2.78 trillion (as of 31 December, 2017) with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as marketing agent; SSGA FD and State Street Global Advisors are affiliated.

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