Achieving Sustainability
Leaders and laggards: how ESG data defines both
Data will power the future of sustainable investing but the amount of available data is vast and growing quickly. We are developing new ways to navigate this data and target positive environmental and social outcomes.
Step 1: Scoping the investable universe
As active equity investors, our mission is to invest for – and deliver to clients – market-leading returns by participating in the commercial success of well-governed companies.
To succeed in this mission today, we believe alignment with positive societal and environmental outcomes is essential. So we focus our attention and clients’ capital on areas of the market we think can produce these positive outcomes. And we actively avoid certain areas including, those that are being disrupted where the winners are, as yet, unclear – or those that are not producing positive outcomes.
Nitrogen, for example, is a key input in farming, ensuring food crops get enough fertiliser to grow and feed the 8 billion people on the planet. However, given that using too much nitrogen can have serious negative effects – it is three hundred times more powerful than carbon dioxide – there is a concerted effort to reduce the amounts we use.
We therefore have an opportunity to explore agricultural technology companies that develop solutions to help farmers reduce nitrogen use on their farms.
Another example is on-premise software – ie, software that is installed locally – which is being rapidly replaced by cloud-based software. The latter is a more efficient method of keeping systems up to date and avoids companies having to spend heavily on IT hardware and manage costly implementation projects. Providing reliable and secure cloud services is a scale business dominated by fewer than a handful of operators globally. Given these positive fundamentals, we believe their revenues will continue to grow at attractive rates for many years to come.
Or consider the future of payments: cash as a percentage of all payment types has been declining steadily for many years due to increasing use of cards and other types of digital product. This leads us to focus on companies that provide the infrastructure to enable the growth in digital payments.
Step 2: Filtering the universe
Once we have identified the prevailing opportunities, how do we go about building a universe of companies for consideration? Using our sustainable and responsible investing (SRI) approach as an example, the starting point is our best-in-class methodology, which celebrates its 25-year anniversary this year. Simply put, using hundreds of different data points, we score companies based on a set of predefined environmental, social and governance (ESG) criteria and rank them versus their sector peers. Sustainability leaders are defined as best-in-class. The laggards, together with those companies that breach our exclusion policy, account for more than 25% of constituents in a typical benchmark.1 We exclude these companies from our universe, leaving the remaining 75% as the starting point for further filtering.
Looking further into the details is our next step in seeking SRI-aligned growth opportunities. For some strategies we filter the universe to focus on companies we deem to be “quality” businesses – those with predictable sustainable returns, strong balance sheets, good cash flow generation and dependable management teams.
From this we build a concentrated portfolio based on some key conviction positions which are carefully weighted to reflect our fundamental commitment to a sustainability-driven best-in-class client offering.
Step 3: Making data-driven decisions
Selecting stocks with positive societal and environmental outcomes through the investment process is not straightforward. Not only do we need to consider many ESG criteria for each company – but also the myriad sources and methodologies that exist in the market, and the low correlation between different agencies and data providers, which add to the complexity. Our answer to navigating this complexity – and providing transparency to clients – was to build an in-house proprietary tool.
Our sustainability insights engine (SusIE) drives our conviction-led investment decisions based on accurate, reliable and relevant ESG data. SusIE supports this vision by cutting a pathway through the deluge of available sustainability data that includes ESG ratings, scores, key performance indicators, controversies and more.
Take SusIE’s “ESG profile” module. This allows our portfolio managers to access more than 100 analytics for every company in their investment universe. They can screen and compare investment ideas in one tool, leveraging our proprietary scoring system.
Furthermore, the module provides a minimum, average and maximum for SRI scores and for ESG key performance indicators enabling portfolio managers to easily identify companies that are best-in-class in taking action on greenhouse gas emissions or board diversity, for instance.
SusIE also offers an ESG ratings dashboard to show the convergence and divergence of different rating agencies. It also supports the analysis and implementation of the European Union (EU) taxonomy and EU requirements for minimum sustainable investment share of a portfolio.2 These are important objectives embedded into the investment process of our SRI strategies enabling us to support clients’ investment needs by aligning with specific regulatory requirements.
In summary, SusIE acts as a “copilot” for our fund managers who steer the portfolio construction towards sustainability sector leaders, lower reputational risk, and a set of minimum sustainable standards reflecting investor values.
Step 4: Engaging with companies for better returns
How does technology support this? In 2023, SusIE was expanded to include a module that allows stewardship analysts, portfolio managers and investment analysts from across asset classes to record, analyse and visualise sustainability-oriented engagement activities in one central location. In particular, the ability to link different engagements and follow-up discussions over time allows for better coordination and consistent tracking. This module provides engagement activity updates and highlights targeted outcomes for individual holdings – all of which can add important perspectives to investment decision-making.
As a result, transparency has improved and enhanced communication between asset classes. Our equity strategies now benefit from the engagement activity of our fixed income portfolio managers. This all supports our commitment to delivering engagement outcomes.
Centralised access to engagement information via SusIE
SusIE sits within our wider technology ecosystem and is designed to interface with other tools. These include our Intelligent Research & Investment System (IRIS), which supports equity teams’ decision-making. The development of SusIE as a dedicated ESG tool within this broader suite represents, in our view, a step change for our investment teams in managing clients’ assets in line with sustainability values.
We believe data will power the future of sustainable investing. How we use it will make the difference.
1 As an example 28.5% of constituents of the MSCI ACWI are “worst-in-class” based on internal SRI scoring, as at 31 July 2024.
2 Portfolio commits to a minimum weighted sustainable investment share (as determined by the EU Sustainable Finance Disclosure Regulation) of at least 20% and limits exposure to issuers not meeting the Do No Significant Harm principle.
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