Our investment team, comprised of financial and ESG professionals, is responsible for integrating financial and sustainability factors into our investment process. We believe ESG research helps us identify companies that should be successful over the long-term. We seek companies that can capitalize on new market opportunities, implement efficiency improvements, and avoid unanticipated costs stemming from inadequate attention to ESG risks. As a result, Boston Common believes ESG research helps improve portfolio quality and financial return potential.
We integrate ESG factors at every stage of our research and investment process: in the definition of the investable universe, through ruling out companies with the worst records; in the stock selection phase through detailed company research identifying leaders and laggards; and in the portfolio construction stage where our goal is to raise the portfolios' ESG profiles. There are no exceptions to the application of our responsible investment policy.
1. Quantitative Screening + Initial ESG review
We begin the equity selection process by creating a diversified monitor list of what we believe are high-quality stocks. For our international and global strategies, we construct monitor lists of securities drawn from the appropriate benchmarks - US S&P500, MSCI EAFE, MSCI ACWI, MSCI ACWI exUS or MSCI Emerging Markets indices. We screen these lists using financial metrics such as capitalization, liquidity, profitability, and leverage as well as environmental, social, and governance criteria. These screens exclude companies that have consistently lost money, taken on unsustainable levels of debt, or experienced such volatile operating performance that we would not be confident in projections about their future profitability.
2. Fundamental Research
Using an ESG lens we examine the material risks and opportunities that impact companies in the same sector. Similarly, our financial analysts cover the global sectors in which they have developed specific expertise, generating stock ideas in those sectors, monitoring our holdings, and tracking market dynamics. Beyond the initial quantitative universe screening and careful consideration of top-down forces, the focus of our research process is bottom-up, fundamental research on specific companies. The ESG team produces a detailed research report on each company under consideration for inclusion in the portfolio. Once the stock has been vetted from an ESG perspective, our global sector analysts all contribute to the creation of a focus list which identifies companies which are high quality and trade below their intrinsic value.
3. Sector Level Understanding of Risks and Opportunities
The ESG team presents their analysis of the material issues in each sector, highlighting emerging issues, best in class practices, risks, and opportunities. They also highlight leading companies in each sector. If the fundamentals and valuation analysis corroborates and supports the idea, such ESG leaders may be bought into the portfolio. A complete sector level ESG analysis is done about once in 18 to 24 months. A more frequent financial analysis at the sector level is also undertaken, twice a year, by the sector analysts, with the goal of analyzing sub-sectors and create an update on changes arising from macro-economic trends, fundamentals, and valuation changes.
4. Portfolio Construction
Using the stocks which have been vetted and approved by both teams we construct a portfolio of 60-80 names, in which each security usually has a weight ranging from one to three percent of the total at purchase. We prefer to buy the strongest companies from an ESG perspective. We will not, however, invest in a company which, in our opinion, has a weak investment outlook even though it may have a strong ESG profile. In some industries we are currently unable to find enough companies with both strong investment and ESG profiles; we also buy companies that are better than average from an ESG perspective if we believe they are financially attractive. In these instances, we seek to raise the social profile of our holdings by urging the management of portfolio companies to improve their policies and operations through active shareholder engagement, proxy voting, or other engagement strategies such as public benchmarking or improving industry standards.
5. Ongoing Portfolio Maintenance
In addition to monitoring traditional financial metrics relative to the benchmark on an ongoing basis, Boston Common tracks ESG profiles and shareholder engagement accomplishments over time. In some instances, we have discovered that a holding's ESG profile has changed so that it would no longer pass our initial screening criteria; in this case, we have sold our holding down to zero. The opposite has occurred as well - a company has improved their profile so that they are eligible for purchasing.
6. Long-term Shareowner Engagement
Our engagement is intended to support long-term thinking and decisions by corporate managements. We believe that long-term oriented decision making will improve the fundamentals of the company, eventually becoming reflected in the value of its shares. These improvements may take the form of lower risk premia, higher earnings, cost savings, product and process innovation, policy changes, etc. As shareowners we seek transparency and accountability from companies, but also empower steps towards better environmental, social, and governance frameworks.