Our equity investment teams all integrate ESG in line with their own process and philosophy. The examples above are from more than one team.
The language below provides more detail from the team that provided examples 1 and 2 above:
We are an active manager with a long-term, private equity approach to investing. Through our proprietary bottom-up research framework, we look to invest in those few high-quality businesses with sustainable competitive advantages and profitable growth when they trade at a significant discount to intrinsic value. Given the rare confluence of quality, growth, and valuation, we may study dozens of companies but may only invest in a select few businesses each year. We believe identifying those few businesses with these characteristics is an art, not a science. As a result of this rigorous approach, ours is a selective, high-conviction portfolio of 30-40 names.
As long-term investors, we believe a company’s ability to generate shareholder value over our investment time horizon is linked to the sustainability of its quality characteristics and growth opportunities. A successful business will attract competition and capital. Without the sustainable competitive advantages, or high barriers to entry, profit margins could shrink and returns on invested capital could be lowered for that business. We believe that long-term results cannot be realized by management focused on short-term objectives. Therefore we want to invest with management teams that share our long-term perspective. We evaluate their ability to allocate capital to investments that create long-term value and look for incentives aligned with long-term shareholder interests. We believe the ability to generate sustainable free cash flow growth, at levels required to meet reinvestment needs, is another key characteristic of a high-quality quality business. Continuous reinvestment in the business, by management teams who lead with vision and integrity, and who are not influenced by short-termism, allows the company to sustain and extend its competitive advantages and quality characteristics. We believe the short-termism, so prevalent in today’s market, is detrimental to sustainability and value creation. In our view, investors can benefit when environmental, social, and governance considerations are analyzed from an active, long-term bottom-up research perspective – and intimately linked to a company’s sustainable competitive advantages and profitable growth opportunities. We believe it is these characteristics and structural view that enable management teams to look beyond the next quarter’s results and invest in ways that sustain and extend a company’s ability to generate long-term shareholder value.
We believe the materiality and relevance of ESG considerations cannot be identified and understood by fixed rules and quantitative screens. Instead, we believe ESG issues must be viewed in the context of specific industries and companies and in relation to any potential impact on a company’s long-term competitive advantages, intrinsic value, and ultimately long-term investment performance. Understanding how an investment philosophy informs a manager’s decision-making process can provide meaningful insights into how and why a particular investment manager approaches environmental, social, and governance (ESG) criteria. In our view, investors can benefit when ESG considerations are an integral part of an active, long-term, research-driven investment process. With an owner’s mindset, we seek to develop a deep understanding of the drivers, opportunities, and limits of each company, including material ESG elements, through our disciplined and thorough bottom-up fundamental analysis. Loomis Sayles provides third party ESG research to which we have access and evaluate independently. Ultimately, we rely upon our independent, proprietary analysis to determine the materiality of ESG issues on a company-by-company basis.
The language below is more detail from the team that provided examples 3 and 4 above:
We believe that ESG factors are a critical part of our research analysis, valuation, portfolio construction, and risk management. Our investment process targets three alpha drivers: Quality, Intrinsic Value Growth and Valuation. ESG factors are one of the seven dimensions that we analyze as part of the Quality assessment. Specifically, our ESG analysis includes a review of company financial statements and specific ESG data. We engage with company management on ESG topics that we believe are material to the financial outlook. We document these engagements in our proprietary engagement database. Our ESG research is tailored to each company; ESG issues may present different levels of risks or opportunities, depending on the industry. Lastly, we incorporate ESG opportunities and risks into our valuation. We construct three scenarios for each holding: a base, best and downside case. Material ESG opportunities and risks are reflected in this analysis.