We recognise that ESG factors can have a significant influence on the value placed on a company and its ability to drive shareholder returns on a long term basis.
ESG is relevant to a portfolio or investment decision if one or more of the following apply:
- ESG is a predictor of future returns.
- ESG analysis indicates longer term risks that investment analysis may not factor in.
- ESG analysis indicates that there are moral or ethical issues which should be considered.
It is also important to consider ESG issues in light of the chosen method of implementation and investment time horizon. For example, ESG issues will have much more importance for directly or indirectly held securities where the holding period may be three years or more, than for a short term momentum based trade using futures.
Companies that undertake activities that are socially undesirable or environmentally damaging expose themselves to the longer term risk of regulatory change that adversely impacts their business. There is also the risk of fines or paying restitution if the conduct is illegal or negligent. This risk is particularly relevant in some sectors, such as energy.
We will not undertake a formal, permanent “divestment” approach, but rather consider whether the longer term ESG risks are sufficiently captured in the market price, and sufficiently diversified away within an index, or not. Unless the issue is such that it would result in the investment being worthless, then longer term risks are a matter of valuation, and whether the risks are adequately compensated for in the expected investment return. The expected holding period of the investment is also a very relevant consideration in this regard, as these types of risks are more important for assets with longer holding periods.