The What, Why and How of active ESG integration

In Conversation...

The What, Why and How of active ESG integration

David Sheasby, Head of Stewardship & ESG at Martin Currie, discusses the merits of integrating environmental, social and governance (ESG) factors into investment decisions.


What is ESG investing?

Essentially, ESG investing is just about long-term thinking. It means considering the implications of environmental, social and governance factors into investment decisions. The sustainability of a company’s business model is critical in maintaining its competitive advantage and generating strong returns. As a result, companies that are well managed are more likely to be successful long-term investments. Taking ESG factors into consideration means we have a better understanding of companies and how they are run. This, in turn, means we can better judge their ability to outperform in the long-run.

 

Why is ESG important?

The things that are likely to make money today may not be the same over longer time-horizons.

Consider the automotive industry, for example. As technology improves and more governments make commitments to phase out internal combustion engines to tackle climate change, there will be a number of winners and losers. There will be consequences for auto supply chains, oil demand, infrastructure and, of course, for the business models of the automakers themselves.

By integrating ESG analysis into our investment process, we are better able to identify the companies that have taken steps to guard themselves against the risks, and take advantage of the opportunities, this kind of long-term trend will create.

The majority of the value of a company comes from its ability to generate sustainable long-term returns. Companies that think about these long-term factors are more likely to be able to grow sustainably as things change. And that means they are more likely not just to outperform in the long-term, but also that their share prices may be less volatile than those who have not taken this broader view.

 

What impact does ESG have on a portfolio?

ESG analysis and active ownership are about building a greater understanding of companies. That means we can increase our conviction in a stock’s ability to generate sustainable returns over the long term. The combination of better prospects for outperformance and less volatility creates a compelling picture for long-term portfolios, which is why we fully integrate ESG into our investment process.

We believe doing so means investors are more likely to meet their investment objectives, and can do so in a responsible manner – a win-win situation.

 

How do you integrate ESG into your investment process?

We build concentrated, high-conviction equity portfolios using bottom-up stock selection. ESG analysis is fully embedded into our investment decision-making. It is not an ‘optional extra’. It is a key part of the fundamental analysis our portfolio managers carry out when they are looking at whether to invest in any stock. It influences some of our key assumptions such as the cost of capital, revenues or costs and, as such, affects our estimate of a company’s intrinsic value.

We also believe that active ownership – engaging and collaborating with a company’s management and its various other stakeholders – helps protect and enhance the risk-adjusted returns on our clients’ capital. We actively engage and collaborate with management on areas that are material to shareholder value, such as strategy, capital structure, governance and wider sustainability matters, to positively influence corporate behaviour and governance. We also believe that proxy voting is integral to stewardship and our voting policy is designed to enhance shareholders’ long-term economic interests.

Ultimately, we are stewards of our clients’ capital. To us, that means we have to invest their money with the utmost care, which is why we use ESG to gain the best possible understanding of a company’s value. And, through active ownership, we look to positively influence corporate behaviour and ESG standards.

 

Are you any good at it?

Well, the Principles for Responsible Investment has awarded Martin Currie the highest possible rating, giving us an ‘A+’ for each of the three top-level categories: ‘strategy and governance’, ‘incorporation’ and ‘active ownership’ [1]. We believe this is a strong endorsement of our process and commitment to the ESG space.

 

 

 

 

[1] The PRI Transparency Report for Martin Currie and PRI Assessment Methodology are available to download from www.unpri.

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