In line with our investment philosophy of investing on long-term fundamentals, we will forecast the long-term earnings potential of a business in order to assess its implicit valuation or its ability to meet it future cash flow obligations. Each business will face its own unique set of environmental and social circumstances. These need to be examined carefully, especially as hard numbers and details may not be available. Consideration is given to understanding how these should be appropriately factored into forecasts.
Once all the factors relating to environmental and social issues have been considered, these are documented and factored into our models, and the valuation is calculated. Based on this outcome, the investment decision is made. Coronation will not explicitly screen out any issuers due to ESG factors, instead we may require a greater riskadjusted upside or a higher yield before investing in relation to companies with a higher ESG risk profile. The only exception would be where we are concerned about a significant lack of corporate governance in a potential investee company and where, in Coronation’s view, it is unlikely that we would be able to influence management of the potential investee company to improve their corporate governance to the extent required. We will also, depending on the circumstances, take instructions from segregated account mandate clients to exclude from their mandate’s investible universe certain companies that they object to on environmental or social grounds.
Given the differing nature of companies’ underlying business models, our approach is for our research analysts to treat ESG issues on an individual case-by-case basis. We focus on the material ESG issues that are considered likely to affect stakeholders, as this will ultimately have an impact on corporate performance and investment performance. The investment team comprises a large and experienced group of professionals with a deep knowledge of industries, asset classes across multiple geographies and associated material ESG risks and opportunities. In considering ESG factors, we recognize the importance of focusing our attention and time on those ESG issues that can have the most meaningful impact on a company’s long-term prospects. Accordingly, a significant amount of time is spent studying the corporate governance of the companies we invest in. Corporate governance lies squarely within the circle of competence of any institutional investor, and includes capital allocation, remuneration policies and empowerment deals (in the South African context). We favour transparency and comprehensive reporting as this provides the information basis to assess whether a company adheres to high standards of corporate governance and integrates ESG considerations. The environmental and social pillars are more complex, subjective and prone to differing approaches from subject matter experts. Social objectives vary significantly between investors around the world and issues are often fraught with ambiguity. In addition, each business will face its own unique set of environmental and social circumstances. While we systematically review and investigate the potential significance of environmental and social issues, we are cautious to make definitive rulings on complex issues. Our focus centers around areas related to climate change and resource scarcity (e.g. carbon emissions, water usage, energy efficiency, waste management, general environmental impact ); social controversies, health and safety standards, matters relating to labour policies and practices; approach to data security and privacy and in countries like South Africa, the company’s approach to and status of Black economic Empowerment.
In our view, the most crucial area of focus is governance. Boards and management are in an agency position, managing assets on investors' behalf. They should be held accountable to high standards. Since strategy and accountability start at the top, governance is crucial in managing a business, which includes the proper management of environmental and social issues. Governance is the cornerstone upon which the foundation of a company is built. Any weakness in this area, and all parts of the investment case, whether pure valuation or the handling of environmental and social issues, are at risk.
Coronation engages regularly with the boards and management of the companies it is invested in. All these engagements are documented to ensure detailed record-keeping and accountability for boards, as well as for investors to be fully informed as to how their investment is being exercised in the interests of good corporate governance.
When there are specific concerns, our first approach is to engage with management to deal with the respective issues. If this fails to deliver the appropriate action, we then escalate the issue to the board. When governance issues emerge, we do not believe selling out of a company is an appropriate first response. This runs the risk of incurring losses on the investment, and fails to live up to the demands of being a good corporate citizen, who should strive to ensure that companies are applying the correct standards of governance for the protection of all investors.