At Lofoten we strive to incorporate the UN’s Principles for Responsible Investment into our business. We believe that investing responsibly can be a source of alpha in its own right, as numerous studies have shown that companies with higher governance scores in particular create greater shareholder value over the long term. In addition, we think that investing in companies which are run more responsibly is simply the right thing to do, as they are more thoughtful about their impact on people and the planet, and their business will be more sustainable over the long term. We also believe that such companies are likely to be able to take advantage of structural growth opportunities arising from changes.
We do not have hard targets in place, we are more focused on incorporating ESG considerations into our investment process. On initial review of a stock, we check the ESG risk rating provided by Sustainalytics, as well as key ESG controversies, alongside a view on the company’s competitive position, growth prospects, profitability, return on capital and valuation. We run a concentrated portfolio focused on only the highest-quality names, and thus we can be very selective as to how we invest. Once past the initial hurdles, we will spend more time on areas of concern, using our judgement and experience as to what is material, and may not invest if we consider the ESG risks to be too high, just as we may not if we believe the valuation to be an impediment or market forecasts to be too high. We also maintain an active dialogue with company management on many areas including ESG issues.
We monitor and score our portfolios every quarter, hoping that these companies improve and/or remain the same, but we try to avoid companies which decline over time. If some specific new news comes out that has an adverse impact on the ESG risk rating of an existing holding, we would investigate the issue and engage with the company and the research provider in order to make an informed decision about the materiality of the risk and the best course of action. We also have an annual CDP carbon footprint for our portfolio which we intend to monitor.