ESG can be a driver of returns within a responsible investing framework. We consider it crucial to assess a firm’s ESG credentials through company engagement to ensure all material risks and opportunities are understood.
Responsible investing incorporates environmental, social and governance (‘ESG') considerations and is integral to what we do as investors.
It's also a critical part of our fiduciary duty to clients. It helps us make a meaningful difference and supports our objective of delivering long-term returns to clients while contributing towards a more sustainable future for the planet and its people.
We aim to invest our clients' assets in quality companies and issuers that operate sustainably and address the ‘triple bottom line' of planet, people and profits. This requires us to take into account ESG opportunities, impacts and risks.
Value of ESG to investors
ESG information is a powerful source of non-financial data that helps us identify long-term risks and opportunities that traditional fundamental analysis cannot always capture. ESG data can help us achieve a fuller understanding of businesses and can be a driver of returns. As such, ESG data and analysis can add significant value as part of our quantitative and fundamental (‘quantamental') investment process.
We integrate ESG into our research at every stage of the decision-making process. As active investors, our ESG research assesses opportunities and risks at a security level using sector-specific frameworks. We seek to understand practices such as climate change mitigation, labour relations, litigation and regulatory pressures that could lead to unexpected losses and impair cash flows.
Climate change will continue to have an enormous impact on society and returns from capital markets. Recognising the importance of climate change as an ESG risk, we seek to invest in companies that recognise the challenges of climate change and adjust their operations accordingly.
As long-term investors, engaging with company management is a core part of integrating ESG into our investment process. Engagement improves our understanding of the businesses we invest in and, when combined with active voting, empowers us to influence company's management to change for the better.
Through engagement, we can encourage companies and issuers to implement best ESG practice, codes and standards. The ultimate aim of such engagement is to deliver better long-term performance and reduce risk while promoting a more sustainable world. Our engagement activity also helps us satisfy the UN Principles for Responsible Investment, to which we have been a signatory since 2016.
Our long-term view means we can build and maintain a dialogue with company managements in order to improve their ESG performance. This increases the likelihood that companies will improve their ESG performance over time.
We recognise that companies are at different stages of maturity and that some might be unduly penalised under traditional ESG rating systems. Therefore, we consider the direction of travel of a company's ESG performance (or momentum) as well as its point-in-time development when assessing the company's ESG credentials. Our research shows that such ESG momentum may have a beneficial impact on investment performance.
Dialogue with investee companies
Our investment team leads our engagement activity because we believe this has the greatest chance of making a meaningful change to ESG performance. We identify an ESG issue that represents a material long-term business risk or opportunity and how it relates to our investee companies. We hold constructive dialogue with these companies as we build relationships over time. We look to set objective goals for companies and, depending on the complexity of the issue, may set incremental milestones for improving the management of the issue.
By engaging in this way, we can help companies to better their ESG credentials, which may lead to better long term returns for investors.
This post was funded by Davy Global Fund Management
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