he 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 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.”
“…we believe sustainable, well-managed companies make more successful long-term investments.”
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust
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 t
