As active equity investors we believe that integrating a company's ESG performance within our fundamental analysis is a tool for both value creation and risk management; there is powerful evidence that companies with sustainable business models deliver superior long-term financial returns. ESG integration is undertaken for all the active equity assets that we manage.
Our active equity strategy is to create and manage concentrated portfolios where stock selection is the key driver of performance. The rigour and depth of our fundamental research is central to a comprehensive assessment of the risks and opportunities at a company level. The careful scrutiny of ESG factors is an important element of this and features in the investment process for each and every equity strategy we manage. We believe in a practical approach to integrating ESG factors, focusing on material ESG issues which have clear linkages to key business drivers and see the main benefits of incorporating ESG factors as follows:
- Deepens our understanding of companies and the environments in which they operate, helping us to quantify risks and opportunities
- Strengthens our conviction in our investment theses, thus supporting the management of concentrated, high-conviction portfolios
- Promotes a long-term focus, as evidence shows that companies which rank well from a sustainability perspective are more likely to outperform as investments over the long term
We are investing in management teams as well as businesses they run on shareholders behalf. Company meetings and regular engagement with boards and management teams are at the core of our approach to equity research. We use our influence with portfolio companies by highlighting ESG performance gaps and ways to improve. It is our belief that companies with positive ESG momentum will be rewarded by the market over time.
Central to the incorporation of ESG factors in our investment process is our independent Responsible Investment (RI) team, which is responsible for monitoring and assessing the ESG approaches, performance of and engagement with investee companies. The team monitors material environmental, social and governance issues associated with the industries and companies we research and communicates material factors, positive or negative, to the investment team as well as providing regular training on ESG across the business. The RI team's strong relationships with our investment team enables material non-financial information to be incorporated into our investment analysis and decision-making.
ESG integration in active equities spans the breadth of the investment process; from identifying trends analysing securities and portfolio construction to engaging with the companies that we invest in, voting and reporting to clients.
Screening & Integration:
In addition to the incorporation of ESG factors in the investment process for all of our equity strategies, we also have a long history of running dedicated responsible investing strategies. Our first such strategy, the Ethical Equity Fund (UK equities), was launched 30 years ago and applies a broad range of client led exclusions at the start of the process, followed by a fundamental research process which emphasises the importance of good governance and engagement with investee companies. Our Ethical Cautious Managed Fund (UK equities and sterling denominated corporate debt) also follows this broad outline. The ethical screens that are applied are reviewed every two years in a consultation exercise with investors
The Global Sustainable Equity fund also incorporates an exclusionary screen at the outset of the process. This is then augmented by in-depth sustainability analysis of each and every potential investment, with a view to constructing a portfolio of innovative and disruptive companies that are addressing the sustainability challenges faced by society. Our analysis looks at a company's products, processes and record of sustainability improvement and categorises it as a leader, improver or laggard. Only leaders and improvers are eligible for inclusion in the portfolio and we focus on improvers, as we believe this is a powerful way to benefit from companies which are affecting positive change. Furthermore, academic evidence supports the premise of investing in sustainability improvers as one of the most powerful ways of generating alpha from sustainable investing and suggests that improvers typically offer greater outperformance than leaders. Our sustainability analysis is updated periodically, and companies can be upgraded or downgraded based on their progress on the sustainability KPIs we track.
Although we do not run any 'thematic' equity funds, at times, portfolio managers may incorporate thematic strategies in overall portfolio construction. Often these themes are ESG related, for example increased energy efficiency from OLED screens or lower CO2 emissions from electric vehicles.