ESG-related risks and opportunities are identified on a case-by-case basis by all members of the investment team and are identified through their investment process. Through our extensive company visitation effort and targeted research agenda, Greencape has a heightened ability to source proprietary information from multiple sources on key factors which may influence a stock. Examples of such sources include a company's competitors, customers, suppliers, management, board, past employees, industry bodies, trade journals, regulators, government agencies and companies in other industries or geographies with similar business models.
Our investment process involves assessing and rating four criteria: Shareholder Stewardship, Business Evaluation, Valuation and Market Milestones. The analysis is ultimately condensed down to a single stock recommendation ranking, facilitating both transparency and accountability.
We embed consideration of ESG risks in our process rather than overlay an ESG process and this has always been a part of our investment approach. As mentioned our investment process evaluates (and scores) the criteria listed below for all stocks we analyse. At each stage of the process we are considering and analysing issues/risks/opportunities which incorporate ESG issues as follows:-
Shareholder Stewardship: We consider for example
- Corporate governance- this involves an assessment of sustainability issues/risks and opportunities.
- Remuneration - this considers the alignment of remuneration with those of shareholders and the investment horizon over which behaviour and results are measured.
- Management and board effectiveness - this considers track record and reputation in acting in the interests of shareholder value creation.
- Corporate culture - we assess accountability, transparency and consistency of message through an organisation.
Business Evaluation: We consider the sustainability of returns through an economic cycle (typically 5- 10 years).
Valuation: We value each stock in our universe. We typically favour using the Discounted Cash Flow (DCF) valuation methodology which typically involves a 10 year forecast. This forces us to consider medium to long term sustainability issues and potential liabilities which include ESG issues.
Market Milestone: We consider the likely impact on a share price from the upcoming news flow likely to be released on the stocks we assess. This includes ESG issues (i.e. Environmental issues with mining related companies) which may influence market sentiment towards a stock.
We are particularly focused on governance issues, including capital allocation policies and executive remuneration structures. Capital allocation decisions can, in our view, have a very material impact on the future performance of a stock, and we are heavily focused on assessing company management's track record of allocation decisions, and strategy for the business going forward. Executive remuneration arrangements are also of importance, as they influence behaviour and culture. In general, we advocate for structures that promote a focus on long-term shareholder value creation and have appropriate and quantifiable metrics in place to assess performance.
Any relevant ESG issues are incorporated into the risk profile (positive or negative) of a company either in the qualitative assessment of the company or directly in the valuation parameters which can influence conviction and hence portfolio weight. An example of avoiding stocks re ESG is Crown. It didn't pass thru our governance assessment re shareholder stewardship. We also think the blatant focus on gambling - especially pokies and online betting has some social brand & regulatory risk.