1. First filter - liquidity: daily traded volume: all invested companies must have a minimum daily traded volume of USD500k. Bid-ask spread: JBI wants to be a price taker, not a price maker.
2. Second filter - sector risk: exclusion of highly regu-lated sectors. Exclusion of risky sectors with low competitiveness. Exclusion of companies dealing with armament, asbestos or tobacco.
3. Third filter - governance: business analysis like transparency standards, dividend and share buy-back policies, alignment of interests (reason for the exclu-sion of state-owned companies, since political incentives > economic incentives). Rigorous due diligence of control structure: reputation of management/controlling shareholder(s) / Board of Directors, check of past regulatory issues, related parties transactions, incentive policies, commitment and/ or independence. Analysis of legal and ethical standards.
Value: use of fundamental analysis based on conservative parameters. JBI looks for business managers with the right incentives to create long-term value. Price vs. Value analysis: JBI looks for underperforming stocks where intrinsic value is larger than market value plus a margin of safety.
Events: The Funds may pursue new investments following a corporate event with potential impact in the value of a given company (e.g. M&A, corporate govern-ance changes, special dividends). The regulatory knowledge of the portfolio managers plays a key role in assessing the impact of such events.
Themes: strong long term trends affecting certain sectors or the economy as a whole may also result in new investment ideas.
Why does JBI incorporate environmental and social factors into investment process?
In line with what we think and practice.
Purpose of reducing the medium / long term risk of the portfolio.
Continuity to our Governance analysis, which has always been part of our investment philosophy.
A combination of doing good for society and not doing harm to investment returns.
ESG factors are material to developing a complete understanding of risk and opportunity which is needed to succeed in achieving long-term, sustainable investment returns.
Cooperation with companies in our universe to engage in these causes.
When we became signatories of the PRI, we committed JBI to incorporating environmental, social and governance (ESG) factors into our investment process.
It was our opinion then, and it still is, that governance is the most relevant factor for any responsible investment process. It has been the basis for our investment philosophy and process since we started. We have simply moved a step further and added factors relating to "E" and "S" to our analysis. This is an ongoing process and ESG factors are becoming fundamental components of our investment process.
We have chosen six environmental factors to monitor: i) water and energy use; ii) carbon emissions; iii) waste / hazardous materials disposal and treatment; iv) environmental policies and certificates; v) key raw materials usage; and vi) appropriate handling processes.
On social issues we are analysing: i) health and safety procedures; ii) social engagement; iii) disclosure of employee-related information; and iv) working conditions.
Based on responses to a questionnaire, a “JBI E&S Score” is assigned to each company. This score is then used to check for imbalances and / or different risks. It should be noted that, as opposed to governance findings, those relating to "E" and "S" are not necessarily levers to exclude companies from our universe, except for the negative screens already in place such as: tobacco, armaments, asbestos and child / “slave” labour.
After establishing our E&S score, we classify companies according to their sectors and compare their performance relative to their respective peer groups. Our main concern is to understand why companies in the same sector or industry have different scores. In order to do so, we determine which companies can be considered benchmarks in their sectors and, where appropriate, engage with the other companies in order to improve their E&S scores. As responsible investors, we want to make sure that managers incorporate possible environmental, social and ethical impacts into their strategic thinking and business decisions.
Our ESG analysis aims to identify risks and opportunities in every company we invest, taking into account the risk characteristics for each sector.
The first thing to note is, perhaps as expected, that companies that already produce an Annual Sustainabil-ity Report were better prepared to answer our questionnaire. These companies are much more willing to discuss and answer questions on environmental and social issues. Another thing to note is that companies are becoming more aware of the importance of incorporating ESG into their risk management framework. About three years ago, we flirted with the idea of analysing E and S practices in our JBI Universe and the level of response was quite disappointing.
It is also noticeable that larger companies tend to obtain higher ESG ratings. This is not at all surprising, considering the human and financial resources needed to analyse and implement ESG policies. Yet another observation is that companies that completed IPOs recently don’t disclose much information about this matter. In our experience, it takes at least one year for companies to address these questions.
As investors, we are in a singular position to influence businesses into adopting best business practices. In summary, our purpose so far has been twofold: by pushing companies to answer non-traditional investment questions, we are throwing new light on issues that could impact investment decisions; as investors, we are hopefully reducing our portfolio risk, thus improving long term returns.
Our goal is to combine the mostly quantitative analysis of “JBI E&S Score” – focused more on whether or not companies have and disclose their environmental and social policies – along with a qualitative analysis that we will be able to assess as this theme evolves. This qualitative analysis will be made through comparisons of each company’s E&S policies, track record of indicators, engagement and alignment with strategic plan. Finally, we are establishing a “JBI Key Questions by Sector”. With regards to understanding which E&S factors are most critical to a particular company, a sector-based approach is essential.