Assessing the significance of ESG related risks and opportunities is an integral part of our bottom-up research process. Governance issues are considered within our Quality rating. The key element of this analysis is the company’s treatment of shareholders and its use of capital. On environmental matters, we believe that a lack of consideration for environmental issues can negatively impact the growth of a business and its long and short term profitability. However, we consider social issues to be moral judgments and therefore a matter of opinion and, as such, we rely on our client’s direction.
We encourage high standards of ESG when we meet with senior management of a company. In our company meetings we will discuss strategy and corporate responsibility issues with company board directors and executives, as we believe that these factors affect the potential for a company to deliver long-term sustainable value to shareholders. Such factors include remuneration, finance, climate change, reputation and litigation risks, deployment of capital and energy efficiency.
The primary focus of Longview’s investment process is to understand the quality of a company and the value of the cash-flows that it can generate. Within our analysis of quality, a large focus is on understanding management’s approach to the reinvestment of cash generated and balance sheet management. We do not seek to prescribe a specific approach, rather we ask management to be thoughtful of their actions and to show that due consideration has been given to all options, with an aim of maximising shareholder returns. If we believe management has a poor track record of doing this or inappropriate plans for the future, we will not invest in a company, even if it has other positive investment merits. Where we have concerns that the company’s management is not acting in shareholders’ interests, our investment team will make clear our concerns to the company. As a concentrated long-term investor we often find company management appreciative of our input.