Investment Institute

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

  • 17 October 2022 (3 min read)

It is our long-held belief that high-quality fundamental stock analysis provides a potential opportunity to deliver favorable investment outcomes.

We are often asked whether it would be easier to rely solely on third-party providers’ 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. 

ESG homework

Conducting our own ESG analyses allows us to emphasize the key ESG risks and opportunities we feel are important to a particular company. Experience has shown that this can result in a departure from third-party providers’ analyses.

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 to fully understand and identify any gaps in our knowledge and encourage further progress. It is a methodical, bespoke, and collaborative process, which we undertake with the mindset of a partnership embarking on a journey together.

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

Fundamental analysis

By engaging with businesses, we can understand their trajectory early on in the process, sometimes earlier than third-party agencies themselves. We can see where the shifts are coming 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 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 graduated 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 significant pride that we can see corporate change is coming. Companies are working furiously to understand their carbon emissions, direct capital to “greener” products, services and packaging, understand the human and environmental impact of their supply chain as well as improve 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.

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

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