When we pick a stock to invest in, we make assumptions about how the company is being managed and what its value is. We determine that the CEO isn’t taking wild risks that could run the company into the ground, and we estimate the value of the company based on measurable things like its physical assets, as well as intangible things like its reputation.
Bruno Bertocci, managing director of UBS Global Asset Management’s Sustainable Investors Team, makes the case for the new standards being developed in the US by the Sustainability Accounting Standards Board, or SASB. He says since investment analytics have evolved to include intangible, yet material, facets of a company that are not governed by financial accounting standards, corporate disclosure should be extended to these facets and particularly environmental, social and governance (ESG) factors. And they should be standardized.
“Sustainable investing, the way we see it, is really just an evolution of traditional fundamental investing,” he said on a recent webinar. “We think that in 10 years we won’t be having this kind of discussion; we’ll just take it for granted that we should be looking at this kind of information.”
Bertocci points out that investment analysis as we know it is based on a 1934 book called “Security Analysis” by Benjamin Graham and David L. Dodd. The process that made sense to use in the 1930s was a mosaic of financial analysis, valuation, qualitative assessment, and management interviews. “This analysis is about figuring out what the brick and mortar and the machinery and the inventories and the accounts receivable are worth and subtracting the debt, and you’ve got a book value,” says Bertocci. “In 1934 a company’s book value and its market value were highly related, because that’s how people thought about valuation,” he says. “But a couple of things have changed in a big way since the book was written.”