Matarin integrates ESG in our investment process by focusing on 5 key pillars: 1) Opportunities to Increase Returns; 2) Opportunities to Minimize Risk; 3) Customized Negative Screens; 4) ESG-Focused Proxy Voting; and 5) Matarin’s Own Social Responsibility & Impact.
1. ESG as Predictor of Stock Returns
When forecasting stock returns at Matarin, our process is to first think fundamentally about the ‘why’ and ‘how’ of each individual investment insight, and then complete a quantitative analysis of the unique ideas that merit more consideration. So with ESG indicators, like any other investment ideas, we first ask ourselves “Why would this idea matter to stock prices, and do we believe the stock is being mispriced?”
Matarin has engaged with a number of ESG research and data providers over the course of the past several years including, for example: Governance Metrics International (GMI), Ethical Investment Research and Information Services (EIRIS), Sustainalytics, Sustainable Accounting Standards Board (SASB), Bloomberg, MSCI ESG, ISS Ethix, TruCost, TrueValue Labs, and CDP (formerly the Carbon Disclosure Project).
The Patience Premium strategies integrate ESG data from Sustainalytics into the Patience Premium scoring system, which forecasts returns, in its “Catalyst” concept, as follows:
Our “Progress Toward Sustainability” factor, focused on Long-Term ESG Momentum, is calculated by comparing the current level of the Sustainalytics Environmental, Social and Governance ratings to a multi-year average. The same calculation is completed for each of the ESG scores, individually.
Companies making progress towards sustainability is an important catalyst for their ability to be able to earn long-term returns. If we are investing for the long-term, we want to know whether a company is preparing for the environmental and social realities of the future.
There is an open question among market actors about whether ESG investing can add to returns. In Matarin’s view, one important key is to consider ESG investing through the lens of long-termism. In fact, we believe there may be something like a “J-Curve” for companies making progress towards sustainability. Because when a company makes an investment to become more sustainable, this may come with an immediate cost in the early years which may even be a drag on cash-flows or earnings (and stock prices). But in later years there’s a hope that this will be a ‘Catalyst’ for better fundamental results in the future, and thus stock price appreciation
At Matarin, we view the inclusion of ESG Factors, like the long-term progress towards sustainability factor, as examples of true ESG integration, in which ESG ideas are included in the same way and on equal footing with other fundamental or technical return and risk factors.
2. ESG as Mitigator of Risk
In addition to evaluating traditional ESG indicators based upon their ability to predict returns, we have critiqued and evaluated ESG factors based upon their ability to predict or mitigate portfolio risk.
This strategy integrates ESG into the Patience Premium scoring system, which forecasts returns, in its “People” concept, as follows:
When investing in a company for the long-term, we want to know that it has stakeholder-friendly leadership. This means avoiding companies that have been led through serial or severe ESG controversies. When ESG crises are too frequent or too deep, it may signal a tarnished organizational culture, starting from the top.
We’ve developed a technique to eliminate the “Worst In Class” ESG Controversy stock(s) within each region-sector peer group (for example, most controversial among European Materials), based upon the Sustainalytics Controversy scores across 10 categories, such as supply chain, products and services, governance, etc.
Such companies tend to underperform the market over multi-year periods, importantly driving the long-term investment case for good ESG.
We also believe that the elimination of fossil fuel stocks from the portfolio will mitigate absolute risk on a forward-looking basis.
3. Customized Negative Screens
As discussed elsewhere in this document, this strategy is designed to exclude fossil fuel producers, fossil fuel guzzlers, and tobacco stocks. These exclusions can be reversed or changed for clients who choose to invest in separate accounts.
In fact, over 50% of Matarin’s existing institutional client accounts have such customized negative screens in place. Because Matarin builds portfolios using quantitative tools with a focus on optimizing risk, the impact of these negative exclusions is directly mitigated.
4. ESG-Focused Proxy Voting
In the equity markets, shareholder action through proxies can be the most direct way to have impact on a firm’s business practices. All proxies voted by Matarin on behalf of its clients are voted based upon ESG standards, through our proxy-voting partner, Glass Lewis which is partnered with Sustainalytics for ESG research. Our ESG proxy guidelines focus on sustainable business practices such as ESG disclosure, risk mitigation and good governance.
5. Matarin’s Social Responsibility & Impact
At Matarin, we are very focused on our own social responsibility and impact as well. Key areas of focus for our team are:
- A focus on team diversity as a driver of success — as Matarin is a women- and minority-owned business
- Promoting best practices for our industry in terms of integrity and fairness — for example at Matarin we have policies focused on fair fees, restricted political contributions, no soft dollars, and nurturing a culture of stewardship
- Community engagement through volunteerism in the fields of responsible investment, youth and education, women’s entrepreneurship, and diversity in asset management.