ESG is incorporated into our investment process in two ways:
- Integration of ESG considerations in the investment process – research, analysis & investment decision making
- Portfolio screening – negative and positive as required by the client
Integration of ESG considerations in the investment process
Each of our investment teams has its own investment process for its particular strategy, which is determined by each Portfolio Manager. However, ESG is consistently integrated into each team’s analytical processes, with the purpose being to identify and consider material risks and opportunities related to the ESG factors.
Our teams have adopted a common “ESG Matrix” framework for integrating ESG issues into their company analysis, alongside fundamental considerations. The key features of the ESG Matrix are as follows:
1. Focus on measurable and/ or objective data to ensure assessments are consistent and unbiased, emphasising:
- Environment: absolute levels and trends in factors including but not limited to carbon emissions, water consumption and waste production.
- Social: ethical behaviour, staff turnover levels, operational health and safety performance, diversity and community engagement.
- Governance: Governance structures and processes, Board of Director (“Board”) meeting attendance, Board skills and gender diversity, management remuneration structures (incentive alignment and hurdle levels), historic value creation / destruction of management and Board.
2. For each company, qualitatively assess and quantitatively rate each E, S and G aspect of the company in terms of:
- Performance – rate as good, acceptable or poor, and
- Materiality – rate as low, medium or high.
3. Add the scores for the individual E, S and G matrices into a single, overall company score. The worst scores are for companies with high materiality and poor performance. Conversely, the best scores are for companies with high materiality and good performance.
4. Include ESG aspects in ongoing company monitoring to detect improvements or deterioration of scores over time, and configure into our investment views accordingly.
At a minimum, the output of the ESG matrix is considered alongside all other investment considerations as one component of the investment process for determining a company’s eligibility for a portfolio. Some Portfolio Managers take a further step and choose to incorporate the impact of ESG by increasing the discount rate and therefore reducing valuation estimates based on poor ESG assessments, while others go yet further and use a poor ESG score as a “knock-out”, which renders a company un-investable until the ESG profile improves. In some cases, our Portfolio Managers have added consideration of ESG themes from a “top-down” perspective to influence country and/or asset allocation.
Portfolio screening is a rigorous process which enables portfolio managers to explicitly exclude or include companies with specific business activities in the portfolios that we manage. Where our client mandates require, we use screening to determine the investment universe for that particular portfolio.
Negative screens determine companies that are to be excluded from a particular portfolio’s investment universe. The Global Industry Classification Standard (GICS) (MSCI) allocates every listed company to a particular broad economic Sector and then three Industry Groupings. Particular business activities are excluded by identifying the relevant GICS sector and Industry Groupings, and removing these and their constituent companies from the investment universe. Materiality thresholds (e.g. % of revenues from a particular activity) are used to safeguard that companies who fall outside of a sector but that are exposed to the particular activity are also excluded.