We believe, based on both Morphic’s own experience and a growing body of academic research, that incorporating ESG considerations into the investment process can lead to more informed and holistic investment decision-making and, better investment outcomes for our investors.
Our approach to practising responsible investing comprises of four key components, of which the first two are relevant to this section (the others are 3. Engagement, 4. Transparency):
- Negative & Positive screening
- Integration of ESG considerations in our investment process – research, analysis & investment decision making
Morphic excludes direct investments which have as a significant part of their business activities that:
- Create un-remediated damage to land, air or water.
- Mine coal or uranium.
- Extract oil and gas.
- Tobacco products
- Engage in, or are reliant on, logging of rainforest or old growth timber.
- Are involved in gambling.
- Use cruel or unsustainable methods to farm or produce fish or livestock.
This reflects the values of our clients and ourselves.
Norges Bank manages the world’s largest Sovereign Wealth Fund on behalf of the population of Norway. The fund is managed responsibly and implements an ethical (negative) screen. Norges has the advantage of considerable resource and actively publicises its list of excluded companies (and those under observation) as well as the reasoning for each decision (Norges exclusion list). Consistent with the responsible investing principals of engagement and transparency, we are happy that our Funds can also benefit from their important work. Therefore, any stock excluded by Norges will automatically be excluded from our Funds, including where possible eliminating any indirect exposures we may have.
Morphic seeks to invest in businesses which:
- Find solutions for reducing the emission of greenhouse gases.
- Reduce damage to water supplies.
- Work to improve air quality.
- Provide alternatives to deforestation.
- Otherwise enhance the human experience without creating future problems for mankind or the environment.
At all times Morphic will ensure that at least 5% of every Fund’s net assets are invested in relevant companies. Morphic usually holds more than 5% in these sectors but, with our mission to deliver risk-adjusted returns over the long term in mind, there are often times when opportunities in these areas are unattractive.
2. Integration of ESG Considerations in our Investment Process
Morphic is a signatory of the Principles for Responsible Investment which entails an explicit commitment and the adoption of six principles which we believe will improve our ability to meet commitments to our investors as well as better align our investment activities with the broader interests of society.
Morphic will ensure that all investment professionals are aware of ESG considerations to ensure that these principles are adhered to.
Additions to investment staff will be provided with Morphic’s Responsible Investing policy.
Our Responsible Investing policy will be reviewed on a regular basis and amended to reflect developments in best practice and our commitments to PRI and industry peak bodies (such as RIAA).
Any changes to this policy will be advised promptly to all members of the Morphic investment team.
Integrated ESG Analysis in Stock Research
Morphic conducts an “ESG Audit” to aid the identification and consideration of ESG factors and therefore to complement the research and analysis of potential investments (long and short). The purpose of this process is to identify the material ESG risks and opportunities related to the particular potential investment. This process is completed concurrently with the company-specific research and analysis process and feeds into the final investment decision.
The identification and consideration of material ESG factors is ingrained in the various ways in which we seek to understand how businesses work and forms part of the fundamental research on every investment case along with traditional financial and business factors. These factors are integrated into both the qualitative and quantitative analyses that ultimately lead to an assessment of the company’s fair value, and which then informs discussion of the validity of the original investment thesis. The final investment decision explicitly considers the material ESG risks that are identified during the research process.
When identifying the potential material ESG risks and opportunities of an investment, Morphic’s approach requires the consideration of a series of generic questions covering the analysis of a Company’s management and strategy, financial statements, industry and macroeconomic factors, and valuation considerations. Whilst similar to the questions that are typically addressed in traditional financial and business analysis they are designed to help identify relevant linkages between ESG factors and the Company.
The questions are exhaustive and encompass the following aspects of analysis (as appropriate to the particular company):
- Strategy & Management
- Financial Analysis of Revenue
- Financial Analysis of Costs
- Financial Analysis of Assets
- Financial Analysis of Liabilities
- Financial Analysis of Cash Flow
- Macroeconomic considerations
The final stage of the ESG audit is to judge the materiality of the issues that have been identified as being relevant to the particular company.
The Sustainable Accounting Standards Board (SASB) has led the movement to implement consideration of ESG factors into accounting standards. As part of this effort, SASB has published the “Materiality Matrix” which identifies relevant ESG factors according to industry and highlights materiality.
In judging the materiality of any relevant issues, as well as relying on our own knowledge and experience, the ESG Audit is required to reference the relevant sections of the SASB Materiality Matrix.
Documenting the Process
Having completed ESG audits, analysts are required to summarise the material ESG risks and opportunities in their company research recommendations, which are then rigorously discussed and debated with other members of the investment team.
For the portfolio holdings, ESG audits are updated in light of any new relevant information or at a minimum of once a year.
Please see https://morphicasset.com/wp-content/uploads/2019/03/Morphic-RI-Policy-2019.pdf for further details.