Lazard Asset Management Implements ESG Mapping Tool

Lazard Asset Management has added a proprietary mapping tool to its investment platforms to help integrate sustainability into its overall investment strategy.

The firm designed the materiality mapping tool to allow its investment professionals to map environmental, social, and governance (ESG) factors to the financial performance of a business, and contextualize the issues most pertinent to a particular security, sector, region, or portfolio. To build the model, Lazard combined the Sustainability Accounting Standards Board’s sector-based framework with its own research and data science techniques.

Lazard began implementing the tool in 2019, breaking down the process into three phases: identifying the material ESG factors, understanding how these issues could impact companies’ performance, and integrating the mapped factors into its fundamental investment strategy.

In phase one, Lazard harnessed insights from its 250-plus analysts, portfolio managers and data scientists across equities, fixed income, commodities, and emerging markets. It conducted sector-specific workshops during which the investment teams could discuss the ESG issues that were most material to them across 11 industries.

However, identifying those issues was not enough to embed an effective ESG approach in the firm’s investment processes, says Nikita Singhal, co-head of sustainable investing and ESG at Lazard. 

“Our biggest lesson was that materiality is highly contextual. ESG issues that are material to one company can vary quite widely from another company, because of the sector or industry it’s in, the region it’s in, or something entirely idiosyncratic. It underscores the need for us to stay focused on embedding ESG at the bottom-up, fundamental analysis level,” Singhal says.

This realization led to the second phase of the implementation, when analysts with expertise in particular industries or regions were tasked with developing a framework that broke down how the specific ESG issues identified in the workshops could influence the financial productivity or valuation of a business. Building these frameworks was challenging, Singhal says, adding that there is no perfect approach.

What we have tried to do is say that each of these issues can be fundamental issues, and they can intersect with your investment analysis in different ways

Nikita Singhal, Lazard Asset Management

“Rather than trying to boil this all down to a score that is often meaningless, what we have tried to do is say that each of these issues can be fundamental issues, and they can intersect with your investment analysis in different ways,” she says.

In one example, Catalina Araya, a research analyst at Lazard, developed a framework to show the impact of cyber attacks on companies’ financial statements. She found that a breach can prompt an increase in spending over time, as the company not only has to resolve issues arising directly from the attack, but also must keep upgrading its technology stack and data security going forward.

In another example, Will Parry, an industrial analyst at Lazard, developed a framework looking at how environmental risks and climate change, including events such as droughts or floods, could impact the global supply chains of companies that produce cement. Using alternative data on climate change and analyzing cement company assets, Parry was able to evaluate which regions and companies were most at risk of disruption.

Phases one and two of the materiality mapping tool were completed late last year. By the end of the second phase, Lazard had 45 frameworks published in its internal research database. Its professionals are still working on phase three, which applies these frameworks to companies across sectors and regions. The goal is to complete the final phase by the end of this year.

Singhal stresses that once the final phase is complete, the work will not be over. The mapping tool is designed to be dynamic and will be adapted to reflect evolving sustainability issues and their impact on corporates.

“As we tell our analysts and portfolio managers all the time, this is just the beginning. Completing phase three does not mean that we are done. Our idea is that our materiality mapping tool is a live document. So it will be constantly updated for the most material issues, which will include issues that are not material today but are emerging. And then we will continue to develop frameworks for the ones that we identify as most material,” Singhal says.

Plugging Data Gaps

Lazard uses a mix of public information and alternative data to inform the mapping framework. However, the quality of ESG data remains an obstacle, Singhal says. ESG disclosures are inconsistent, and rating agencies differ in their ratings of the same firms, which “underscores the need for us to not be in any way dependent on external rating companies”, she says.

This is why the firm decided to carry out a proprietary, contextualized analysis of ESG issues and how they impact firms.

Lazard uses MSCI ESG Indices, S&P’s Trucost, and Bloomberg’s ESG data, however. In terms of free data, the asset manager also leverages the World Resources Institute’s Aqueduct tool, which provides a map-based view of regions experiencing acute water shortages.

Additionally, to further build out its alternative data library, the firm is acquiring more data relating to cyber risk and climate risk.