CIO View: ESG

Central to the idea of ESG and long-term investing, is stewardship, and what that really means is taking long term care of assets on behalf of the owner. Your job as a steward is to maintain and grow value over the long term, and in order to do that you need to think about the long-term issues and analyse all of the factors that could affect the financial wellbeing of the portfolio. That, I think, is at the heart of ESG investing, and the way that we implement it into our process. In that respect, we have always had a sustainable investing approach, but we have also made enhancements to that process, and we’ve done so by making ESG factor analysis an explicit, formal criteria that runs through every element of our analysis, from asset allocation to manager selection.

The aspect that we’ve enhanced is how explicitly we have integrated that ESG approach into the way we invest, and that’s really what integration means, being explicit and systematic about how you include ESG factors in investment analysis and decision making. What you find, is that ESG analysis includes a very broad range of themes within portfolio management, from the decline of globalisation and increasing localisation of supply chains, to the adoption of automation and technology and the backlash against inequality. These are the kind of long-term secular forces that are going to meaningfully shape portfolios over the years.

So how does ESG investing come into play when we’re analysing managers? It starts with the due diligence, we’re looking at their policy and approach to ESG, how that’s integrated into their investment framework, whether that marries up with their overall strategy or style of investing, and then things like ownership. Are they an active owner of companies? Do they exercise their voting rights, and do they engage with corporate management? If they do, then we want to know how they report back to investors on their activity, how they demonstrate their willingness to engage with and improve companies, and of course their success in doing so.

It also means looking in detail at their portfolios to see the underlying companies and what kinds of factors and risks they’re exposed to within ESG, and the capability and resources of the manager in assessing these risks themselves. It’s also a two-way thing, we like to form close working partnerships with our managers to make sure that we can also work with them to improve the way that they do things. We’re all part of the same ecosystem, and we’re all trying to improve the way that companies and the economy is run to increase the long-term wealth of our clients. We’ve had great success in recent years in engaging with our managers in this way, to the mutual benefit of all.

On one level, ESG investing is something that you can implement across all client portfolios because it is an integral part of long-term capital management. But there are also elements to it which are subjective, and this plays to our strengths as builders of unique portfolios. While there are some stewardship rules to which we will always adhere, our clients will also have their own views as to how they want their portfolios to reflect their own values. In order to do that, it’s vital that we keep the team engaged with the latest thinking and research in these areas, we need to be constantly learning and adapting. I’m pleased to say that the investment team are all taking the recently established CFA UK Certificate in ESG Investing, it’s a good formal step in making sure that we are always evolving and keeping our knowledge up to date with the latest thinking in this arena.

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