In accordance with our ESG integration philosophy, we believe that, all else equal, the quality of companies' performance on key ESG issues increases the probability that they will be able to sustainably create value over time. One way to reflect this higher probability is to apply a valuation premium to these companies relative to their peers or a valuation discount to companies whose ESG risks are underappreciated by the market.
The physical climate change research with Woods Hole Research Center (WHRC) is also leading investors to consider adjusting their growth expectations for markets and companies where we believe that certain climate variables will have a systemic impact on economic growth. Companies with exposure to acute climate events should see this reflected in assumptions about volatility of earnings. As part of these efforts, the Climate Research team is developing a DCF tool that incorporates probability of an event, and then the impact of that event on the terminal value.