We integrate ESG considerations in our fundamental, bottom-up analysis of potential portfolio companies. We believe earnings drive stock prices and we view ESG shortcomings as a material risk to a company’s ability to achieve sustainable earnings over the long term. As a result, our bottom-up fundamental analysis encompasses non-financial considerations. Issues such as labor relations, corporate culture, environmental responsibility, and overall goodwill are integral to our analysis and are given meaningful weight in our valuation of a potential portfolio company. Conversely, in our experience, companies that seek industry leadership in these areas often (we believe not coincidentally) have some of the best management teams and most durable competitive advantages.
Our Portfolio Manager, Rajiv Jain, has over 20 years’ experience investing in global equities, and is aware of the corporate sustainability challenges and their impact on a company’s valuation, particularly in emerging markets. He purposefully hired two analysts with experience in investigative journalism to vet aspects of a company that are often overlooked by classic Wall Street research. Investigating ESG and non-financial issues and assessing a company’s less tangible, non-traditional assets are an important part of the analysts’ role. These analysts interview regulators, unions, former employees and customers of target companies to enhance our understanding of a company’s management culture and the broader eco-system within which it operates. We also have a research analyst with a deep accounting background. His focused financial statement analysis assesses how aggressive or conservative a management team is with their financial decisions. This helps avoid companies that take undue risks to meet short-term financial projections, but can also be a leading indicator for human resources and compensation related issues, environmental impacts (via unexpected expenses and legal fees), and broader governance issues.
We also subscribe to ISS-Ethix, which provides ESG and reputational research. These ESG ratings are included and used as an informative source within our initial stock screening results. Beyond being built into our initial screens our analysts use this resource to review the ISS-Ethix ESG ratings and sub-ratings to potentially guide them toward additional ESG targeted research. In our investment thesis write-ups, analysts include a section that addresses any ESG/corporate responsibility concerns which are considered in our Portfolio Manager’s investment decisions.