ESG analysis: From ‘in transition’ to ‘leader’ status

It is our long-held belief that high-quality fundamental stock analysis provides the best opportunity to deliver favourable investment outcomes.

And it is no different when it comes to environmental, social and governance (ESG) considerations. ESG analysis is an integral part of the stock selection process – and we put ESG at the heart of stock picking, right from the start.

We are often asked whether it would be easier to rely solely on third-party provider ESG scores. Indeed, it would, but we believe that would also mean missing out on the many insights we gain from performing our own proprietary analysis, in tandem with third-party analysis. 

Additionally, we invest on a multi-cap basis and often the rating agencies do not cover all the companies we are interested in. For example, coverage was recently dropped on three of our strategy’s holdings as they were deemed too small to continue to be covered.

ESG homework

Undertaking our own ESG analysis allows us to place emphasis on the key ESG risks and opportunities which we feel are the most important to a particular company. Experience has shown that this can result in us disagreeing with the outcome of ESG analysis from third-party providers.

As long-term shareholders of our clients’ capital, every company’s ESG analysis matters to us. We seek to engage management teams after conducting our own analysis - not to criticise or cajole - but to fully understand and identify any gaps in our knowledge and encourage further progress. It is a methodical, bespoke and collaborative process, which is undertaken with the mindset of a partnership embarking on a journey together.

We realise that change does not happen overnight, but we know that it must happen, and it is essential that companies are taking steps in the right direction. This is why identifying management teams who understand the significance of both their environmental and social obligations is key; it is not necessarily always about where they are on that journey but their direction of travel.

Fundamental analysis

By engaging with businesses, we can see the direction of travel earlier than the ratings’ agencies. We can see where the shifts are coming long before they are documented in the next annual report or reflected in an ESG score.

It is for all these reasons that we invest in firms which we believe are either ESG ‘leaders’ or those we deem as ‘in transition’ to ‘leader’ status. The analysis gives us confidence that our holdings should be on an improving score trajectory. Indeed, in our latest score refresh, five companies in our strategy moved up from ‘in transition’ to ‘leader’ status, as their scores all exceeded the median threshold of the investable universe.

It may or may not be that this ESG momentum leads to greater share price performance in the short term, but it does give us confidence that the growth opportunity afforded to a company should be less impacted by a lack of focus on their ESG obligations.

Changing times

This is not just an academic exercise. It is with some significant pride that we can state that corporate change is coming. Companies are working furiously on understanding their carbon emissions, directing capital to ‘greener’ products, services and packaging, understanding the human and environmental impact of their supply chain as well as improving the welfare of their employees and communities in which they operate. This is real change and genuine progress that will help move us all closer to the world that we need it to become.

It is our hope that by investing in companies aligned with society and the environment, we will be able to generate attractive returns for clients over the medium to long term.