The investment process can be simply described as first identifying good quality companies and placing on a Universe List and secondly remaining patient to buy shares in the company and place into client portfolios at the right entry point. In quality, we look for companies that generate cash, have high barriers to entry and management are predictable with what they do with the cash. As such sustainability is key and any risk factor that jeopardises the predictability of a business going forward needs to be taken seriously. Some companies will be rejected despite at first sight appearing to be of good enough quality. Once a company is placed on the Universe List it is ascribed a rating (1-3) which is partly driven by corporate governance of the company. A company with a 1 rating we need a lower rate of return to be purchased than a 3 rated company.
ESG integration takes two main forms when assessing/ buying a company and one when holding/selling a company:
1) As part of the research process we will assess ESG risk factors along with other forms of risk (e.g. business disruption) when forming an opinion on the sustainability and predictability of a business e.g. Nestle is a highly predictable business with a number of growth drivers but is it addressing the potential reputation risk from use of plastic packaging and the effect on its business if consumers start to increasingly move away from plastic wrapped goods. If the answer is No it would not be added to the Universe List.
2) The number of shares bought and the price paid (margin of safety) depends on the rating allocated to the company on the Universe List which in turn relates to the corporate governance of the business.
Once a company is held we will engage with management should any risk emerge that could affect the sustainability of the business. This can range from poor use of shareholders funds to addressing working conditions, data protection etc. We will additionally raise an issue with a company if one of our clients sends in an independent report suggesting a company is behaving inappropriately. This has been done a number of times where clients that use e.g. MSCI ESG, Hermes, GES etc have sent in concerns/ copies of reports. In the past we raised an issue with MSCI ESG about the classification of Lockheed Martin as a cluster munitions manufacturer. The information was incorrect and misleading, and as a result MSCI agreed to lighten the classification. Last year a report has been sent showing that Charter Communications scored poorly for carbon emissions. It was an outlier in a portfolio that scored very well for carbon foot printing. According to the report the MSCI ACWI average is 132 Tco2e/$m whereas the Veritas portfolio is 12.9. Despite this we were confused why Charter Communications scored low given they are in a low carbon producing industry and raised the issue with the company. It appears by not having a carbon committee and not reporting carbon emissions, the company attracts a low score (Comcast is classified as a ‘leader’ and in the same industry). Charter Communications is working on more energy efficient set top boxes and needs to fall in line with Carbon reporting. It's not a reason to sell the company but we have written formally to them.