Comgest’s Responsible Investment approach is ESG integration in the context of a stock-picking and quality growth investment philosophy. This means we identify material ESG risks / opportunities of companies. Then we assess companies to see if they have taken measures to mitigate ESG risks and/or to benefit from ESG opportunities. From this ESG analysis we are able to better understand if long-term issues are integrated in companies' long-term strategy. In addition, this ESG analysis enables us to better understand the “character” of the company through its values, ways of prioritising subjects and its overall decision-making process. The ESG analysis methodology is applied in a systematic and pragmatic manner. Priority is given to the most material ESG factors, i.e. ESG risks / opportunities that are most likely to have a negative / positive impact on a company's reputation and valuation. These factors differ according to the sector and context, particularly for different regional investment universes. We assess whether investments are made by the company on long-term aspects to ensure the sustainability of the business. We also carefully monitor weak signals (controversies) to anticipate any future negative impact.
We believe that if appropriate measures have been taken, companies will be rewarded in the long term with above average returns. Additionally we believe that investing in such companies reduces the risk of our portfolios. We therefore select quality companies which are aware of their specific material ESG issues or are in a positive trend of awareness of these issues. Combining ESG elements with financial analysis, we typically build our portfolios by allocating higher weights to the stocks which are of the highest quality in our view, relative to the attractiveness of each stock’s valuation.
Comgest is formally integrating ESG factors into the investment process, using an “ESG discount rate” in the valuation process. Comgest has two ESG analysts who are responsible for carrying in-depth ESG research together with analysts and portfolio managers in order to identify material ESG issues. These key ESG issues are then taken into account in the overall assessment of a company’s “quality” characteristics, as well as assessing investment opportunities and risks. In the case of a significant event/issue having been identified, a memo will be prepared by the ESG analysts and presented at a research meeting. Material ESG information is used by all members of the investment team to support investment decisions.
ESG research is used at different stages of the investment process:
• Before entering a new company into Comgest’s investment universe, to identify any unauthorised activities (eg. controversial weapons)
• For companies in the investment universe, to identify high risk stocks, ESG leaders and companies suitable for engagement activity
• Before the entry into a portfolio, to assess the precise exposure of companies to ESG risks and opportunities and their ability to mitigate these risks and benefit from these opportunities. An ESG risk level is attributed to each portfolio company and is translated into a specific ESG discount rate. This analysis is constantly adjusted as new ESG information is obtained.
• For portfolio companies, to monitor any change in quality / ESG profile and to monitor ESG controversies