The economics of DZ’s new SRI analysis service

The German bank has launched one of the first sustainability ratings systems to include financial perspectives in its metrics. Mike Scott talks to the firm’s SRI research head to find out what it’s all about

Into an already-crowded market, Germany’s DZ Bank has launched a new sustainability analysis service, focusing mostly on Germany but also on larger European stocks.

Most sustainability ratings neglect the economic perspective, says Marcus Pratsch, head of the bank’s sustainable investment research team, and DZ intends to put that right. ‘For a company to be truly sustainable over the longer term, it has to be economically sustainable,’ he adds.

The new service also breaks new ground in including a focus on German medium and small cap stocks – besides stocks in the DAX index, all stocks from the MDAX, SDAX and TecDAX will be analysed, which means a broad coverage including small and medium-sized listed companies.

‘Sustainability is no longer a niche issue,’ Pratsch stresses. ‘It is becoming more and more a strategic and competitive factor and an investment issue. In the longer term, no-one can ignore environmental, social and governance (ESG) issues – and that includes small cap companies.

‘Investor relations departments are finding that there are more ESG investors out there and there is more pressure on them to come up with the information that these investors need.’

For DZ’s ratings, the information for around 150 ESG factors is taken from analysis from the research firm Sustainalytics. The bank’s sustainability analysts then link the data with their own research into the company’s economic sustainability and assign the companies as either ‘unsustainable’ or ‘sustainable’. ‘The equities universe categorised as sustainable investments will in future be marked with the DZ BANK seal of quality for sustainability,’ he continues.

But perhaps the most innovative aspect of the ratings is that they are updated on a daily basis. ‘We are trying to be more dynamic in our approach,’ says Pratsch. ‘Sustainability is a long-term issue, but it is also tradeable. Investors want to have a certain return and they have a right to be informed about these issues and to react to them. They need to be able to restructure their portfolios in the short term if necessary.’

If companies are hit by disaster, as BP was in the Gulf of Mexico and Tepco was following the earthquake and tsunami in Japan in March, they are placed immediately on a watch list and DZ will issue a rapid reaction on an ad-hoc basis. If events mean that they will be unsustainable in the longer term, then they are excluded, Pratsch explains. ‘Sustainability is not a rigid construct. As time passes, companies develop dynamically with regard to sustainability, be it positively or negatively. They must therefore be analysed continuously.’

The hope is that companies that know they are being analysed in this way will become more rigorous in their own analysis of ESG issues, he adds. ‘We have had very good feedback so far. Companies that have not been highly rated have asked us how they can improve. Sometimes, it is not about how sustainable they are – it is simply that they are not communicating what they are doing.’

The service ties in with the current drive from investors for more integrated reporting, whereby companies provide information about ESG issues alongside its financial results. ‘Integrated reporting is definitely something we would like to see more of.

‘It is at a very early stage at the moment, but we think our ratings can help with this.’