How investment companies incorporate ESG into their investment processes.
The growing popularity of investment strategies incorporating ESG (environmental, social and governance) criteria is one of investment’s biggest trends. More investors want their money to be invested in a sustainable way or in a way that makes a positive impact.
Investment companies in the Environmental and Infrastructure – Renewable Energy sectors achieve this by investing in environmental companies and green energy. However, it’s less well known that ESG plays an increasingly important role in the investment process for many investment companies outside these sectors.
The Association of Investment Companies (AIC) has spoken to a number of managers from a diverse range of sectors about the role of ESG in their investment approach and how this benefits investors. Their thoughts are collated below.
ESG: its role in the investment process
Mark Mobius, Joint Manager of Mobius Investment Trust, said: “At Mobius Capital Partners we have developed a specialised active investment strategy built on working closely with portfolio companies to improve corporate governance and to provide a clear ESG pathway. We see ourselves as atypical, as we do not screen out investments or only focus on companies with high ESG ratings. We work with companies on a range of material factors, from helping to improve investor relations to suggesting enhancements to decrease water usage or lower employee turnover.”
Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust, said: “ESG considerations are a natural part of our fundamental research and overall approach to investing which focuses on the longer term. It’s embedded in our process. Our fundamental analysis of any company examines what we call its economics, duration and governance. Environmental and social issues are part of the consideration of a company’s duration and its economics; a business simply isn’t thinking about its long-term future if it’s destroying the environment or abusing the community in which it operates. It will eventually pay a price for this. When considering governance, we focus on whether a company shows a proper regard for the interests of all shareholders and whether it can demonstrate proper stewardship of a company’s assets and value over time.”
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust, said: “Integral to our fundamental research is a focus on environmental, social and governance (ESG) factors, as we believe sustainable, well-managed companies make more successful long-term investments. We believe that to gain a full understanding of how sustainability factors can impact a company’s future returns they must be embedded throughout the entire investment process. Active ownership and engagement are a key part of how this analysis is carried out and will inform a continuous assessment of the investment case.”
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “We take a systematic approach to integrating ESG factors throughout the investment process, from sourcing, through to due diligence and continuing during ownership. For each investment opportunity, our investment teams are required to perform an ESG assessment, using a proprietary ESG due diligence tool we have developed. The tool distils the wide range of potential ESG topics into those most likely to be material for a given industry and geography.”
Examples of ESG investing in practice
Mark Whitehead, Portfolio Manager of Securities Trust of Scotland, said: “We believe well-managed companies that exhibit strong corporate governance are more likely to be successful long-term investments. This sentiment isn’t driven by idealism, but simply by the reality that companies exhibiting strong governance tend to outperform over time. Take Dutch science company DSM for example. Having engaged with the company, we were able to better understand the most material benefits that the company experiences from its well-regarded sustainability programme. In particular, we noted the positive impact its sustainability credentials had on its ability to attract workers, as well as the importance of supply-chain transparency and sustainability for its customers. This increased our confidence in the long-term outlook for the company as well as reducing the overall risk profile of the business.”
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust, said: “Establishing a dialogue with companies enables us to engage on areas where we need further assurance or clarification, often with quite technical questions. Recently we have had a very successful engagement with one of the portfolio’s holdings, Hong Kong-based insurer AIA, around issues of disclosure, governance and remuneration. The clarifications we received from the company helped resolve some of the questions we had, but crucially the process reconfirmed our assessment that the company scores highly in terms of disclosure and indicated where improvement is still possible.”
Zehrid Osmani, Portfolio Manager of Martin Currie Global Portfolio Trust, said: “With a global movement to reduce the human impact on the environment and preserve our precious resources, the development of electric vehicles is a key theme for us. This trend will be driven by both regulations – as governments legislate to enforce the switch away from the internal combustion engine – and consumer demand, as more environmentally-aware customers seek out cleaner forms of transportation. ESG analysis therefore provides the crucial lens for understanding the impact these changes have at a company level.”
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “In 2018, we invested in Techem, a German-based global market leader in the provision of heat and water sub-metering services. During our investment committee discussions, it became clear that energy efficiency was at the heart of the company's offering. By enabling heating and energy supplies to be managed in a more precise and sustainable manner, Techem's solutions today account for 6.9 million metric tons of CO2 emission savings per year, thus contributing to global climate protection objectives. We decided that growing Techem's positive impact on the environment had to be a key component of our business plan. Through our investment, not only of capital but also of human resources, we hope to make a significant contribution to making Techem even more impactful.”
What does an ESG approach offer to investors?
Mark Mobius, Joint Manager of Mobius Investment Trust, said: “First and foremost, taking ESG seriously means risk management. Companies that have good corporate governance and pay attention to the environment and social issues run less risk of becoming involved in scandals, having to pay fines or facing social problems.
“A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors, generated more than 7% of excess returns after 18 months. This is also supported by our personal experience during many years of investing in emerging markets. By taking ESG factors into account, investors can significantly reduce the risk profile of their investments, which over the long term not only translates into positive risk-adjusted returns, but also positively impacts all stakeholders.”
Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust, said: “We do not see ESG as something that restricts our ability to generate returns. It’s a necessary part of what we do. We take a long-term view because we believe it delivers better results, reduces costs and allows the power of compounding to translate into investment outcomes. Anything which affects the long-term prospects of companies is important to us, just as it should be to the companies themselves.”
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “We believe that the integration of material ESG factors into our investment processes is a core part of our duty to act in the best interest of our clients and their beneficiaries. Furthermore, when it comes to managing ESG factors effectively, we believe private market investors have inherent corporate governance advantages compared to their public market peers, both in terms of mitigating ESG risks and creating value from ESG factors through targeted value creation initiatives. Our active, hands-on ownership model provides opportunities to work closely with portfolio companies to implement superior, sustainable investment strategies and enhance investment returns.”
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