Take a look into the work we have done over the past year to implement our ESG programme across integration, engagement and proxy voting guidelines - aimed at improving investor outcomes for the long term. For investment professionals only. Not for further distribution
ESG: 2019 IN REVIEW
We have long held the belief that proactive and systematic environmental, social and governance (ESG) integration can help investors more clearly identify long-term trends and how companies or issuers are positioned against these. It also helps us identify companies that generate profits at the expense of other stakeholders.
Overcoming data challenges
However, we also know that the environmental and social dataset come with a unique challenge, in being underdeveloped. It is partly quantitative, partly qualitative and not uniformly reported, and with the tendency to get confused with ethically-based investment philosophies.
In response to this significant challenge, we have been focused on building a research function to help our investors gain better insights on the securities in which they invest. For investors, this means that our research platform stretches beyond traditional analysis, to include our proprietary Responsible Investing Indicator Model (RIIM). It has helped us create a better filter of the environmental and social datasets we consider for investors’ portfolios.
More ESG in investment offering
Over the past year, we have found heightened ESG interest impacting our client, investee company and regulator interactions. Clients increasingly want to add some level of ‘ESG’ to their portfolios – be it integration or reflecting specific values in their portfolios.
Therefore, we will continue to incorporate ESG factors across our suite of investments, by using ESG factors to make better investment decisions. This will also be reflected in the solutions we provide. Alongside this, we plan to launch more products aimed clients who want to express specific values in their investment decisions.
We anticipate that corporate disclosure will remain a prominent theme, as we have found many of our investee companies looking for guidance on ESG reporting. This is a positive indication of progress towards improving the dataset. We believe all market participants can benefit from the implementation of more globally consistent and standardised environmental and social disclosure. To this end, we have established a seminar for investor relations professionals on the topic.
We have developed a clear structure through the Board of Directors’ Nominating and Governance Committee, to oversee the firm’s ESG activity and receive annual updates.
Over the course of last year, the responsible investing team continued to grow, to the extent that we now have dedicated ESG specialists in Baltimore, London and Hong Kong. In keeping with our culture of rigorous research, we also continued our focus on building ESG tools that enable our investment team to understand entities better from an environmental, social and ethical perspective.
Improved data rigour
On this front, a major development saw the creation of an interface to our Responsible Investing Indicator Model (RIIM) on all investment professionals’ desktops. This allows the entire team to access the RIIM profile of approximately 14,000 securities, to see what drives a company’s score on everything from supply chains and employee treatment to business ethics.
In 2019 we also enabled automated RIIM portfolio analysis, making it much more efficient to analyse how the equity and credit portfolios we manage on our clients’ behalf compare with their benchmarks.
Crucially, we created a RIIM tool for sovereign issuers to analyse the core social and governance factors, alongside environmental factors for the first time. This pillar had been considered qualitatively in the past, but more on a case-by-case basis.
Responsible investing in a pandemic
As I write this letter, I am working from home practicing social distancing, and it is hard to ignore the coronavirus pandemic and the impact it is having on markets. There are many ESG-related investment themes that emanate from the pandemic, but the one dominating many of our discussions with companies is treatment of employees during this turbulent and uncertain time. As our analysts adjust their financial models, target prices, and investment thesis on individual securities, they do have a significant advantage — thinking about how companies treat their employees is not new to them. Our RIIM analysis has a category devoted to employee treatment. The data points captured in this category will vary by the subindustry of that company, but includes items like employee turnover, training, health and safety certifications, and controversies/incidents.
Looking ahead, we expect to continue to deepen the ESG research capabilities across our investment research platform. Using technology to make ESG data more accessible and user-friendly for our investment professionals will remain a priority. Also, we will continue to work to improve ESG transparency for our clients.
As we reflect on our ESG highlights from 2019, global markets are in the midst of extreme uncertainty related to the coronavirus pandemic. It is too early to draw conclusions about the long-term effect this virus will have on companies and economies, but what is clear at this stage is that the culture and values of corporate issuers around the world are being tested like never before.
Stakeholder treatment in the spotlight
Investors and stakeholders will assess companies’ previous statements about their management of human capital, health and safety, community involvement, and the overall importance of stakeholders in a whole new context. We predict these topics will quickly become central to the engagement that takes place between investors and businesses. Over the course of the year, we continued to strengthen our governance and stewardship foundation, adding more specialists to our ESG capability. Thanks to this, we were able to do more and higher quality engagement meetings with the companies in our clients’ portfolios.
In this report, we share more detail around these meetings, and the research process we conduct to determine an entity’s ESG challenges and how they respond to these. This has enhanced our overall understanding of the key risks and attributes of our investments, as we analyse them through multiple lenses.
A focus on advocacy
We are concerned about a weakening of important shareholder rights and investor protections in key global markets. Through direct advocacy and participation in governance-oriented investor associations, we have worked to persuade regulators that stronger disclosure requirements and basic investor protections are essential for fair, liquid and resilient capital markets.
As a recovery takes shape following the peak of the coronavirus crisis, we will focus on the many governance-related ramifications of this period. We believe these issues are likely to include:
While the virus-related upheaval adds a new dimension to our governance efforts, we are confident that we have the resources and processes in place to address these issues in 2020.