30 Sep 2020
At ASI, two areas that typify our approach to ESG are European Equities and Emerging Market Debt. Over the next six articles, we will dig deeper into the respective teams’ beliefs, processes and portfolios – and show what this means for our clients. We hope you find it an enlightening journey.
Conducting deep fundamental investment analysis is steeped in our heritage. That is why considering environmental, social and governance (ESG) considerations comes naturally to us. This has developed and evolved over the last 30 years. The wide-ranging fallout of Covid-19 has only served to magnify the importance of these factors in an investment context (see the end of this article for examples.)
Why is ESG important?
Responsible investing is about delivering value for clients and our approach falls into two areas. Firstly, at the investment stage, we use ESG factors to help decide where best to invest. To do so, we integrate ESG considerations into our research, analysis and decision-making processes. On top of this, we also manage specialised Sustainable Investment funds. These portfolios incorporate stronger sustainability or ethical principles, while others look to generate a positive impact or focus on a specific ESG theme. Secondly, active ownership is how we look after these investments – we call this stewardship. This may be how we engage and set milestones, exercise our voting rights, conduct due diligence or consult with policymakers on matters relating to ESG and stewardship. In short, good stewardship helps ensure we are diligent and responsible investors.
A consistent approach
While the way we embed ESG factors in our processes looks different across asset classes, the underlying principles remain the same. We put stewardship and ESG considerations front and centre.
Our investment process
Our investment activity
Our client journey
Our corporate influence
What does this mean for financial performance?
Our ESG approach has evolved over time as we sought to integrate it into our investment processes. As such, it can sometimes be difficult to appropriately extricate and show the direct link between financial performance and exercising this practice. That said, one aspect where we are confident is that it does reduce the downside risk of investments. This seems like common sense to us. If we are more comfortable that a company understands its ESG risks, then it is in a better position to manage those risks. The company is also better placed to seize opportunities from that effective management. That’s why our standard investment analysis templates ask every fund manager to:
The importance of active engagement
At ASI, we are fortunate to have strong and widely distributed ESG and stewardship expertise. This starts with a centralised resource that works with all investments teams. We divide this resource into research, engagement and voting proficiency. On top of that – and rather uniquely – we have dedicated ESG experts spread regionally across our investment teams. They have a range of functions, spanning fundamental analysis, due diligence and on-the-ground engagement. They also conduct crucial first-hand dialogue with our clients, allowing us to fully understand their needs.
We believe that investors should never underestimate the importance of engagement. Indeed, there are numerous bodies of evidence that cite the benefits of sustained and constructive engagement to long-term investments. For example, the European Corporate Governance Institute found corroborating evidence that successful engagement reduces a firm’s exposure to downside risk[1]. Meanwhile, the PRI breaks down the value creation of engagement into communicative (sharing of information); learning (producing and diffusing information) and political (deriving political benefits).[2] For us, engagement is simply a hallmark of strong stewardship of our clients’ assets. Over time, we believe it improves the quality and often the value of those underlying investments.
Meeting our clients’ evolving needs
As well as ESG integration and strong stewardship, we also offer a range of Sustainable Investment portfolios. We have structured these to meet multi-faceted and evolving ESG-related client preferences.
It is important to highlight the difference between ESG integration and our Sustainable Investment fund range. We have embedded the former across our decision-making processes. The latter, meanwhile, utilises different sustainable investment styles, from screening and thematic, to leveraging our internal ESG scoring system. As such, we categorise our four investor groups as:
To meet the various needs of these investor groups, we have a range of existing and newly developed/developing strategies. You can find more information below and on our website.
ESG in European equities and EMD
Our 15-strong European Equity team have integrated ESG considerations and engagement into their day-to-day decision-making. That is because they believe ESG factors are financially material and can impact a company’s performance. Understanding ESG risks and opportunities, alongside other financial metrics, is therefore an intrinsic part of their research. Put simply, we believe ESG integration helps mitigate risks, unlock opportunities and enhance long-term returns.
The term ‘emerging markets’ can hide big differences in the way policymakers manage individual countries and economies. This includes the resilience of specific bond issuers. Which brings us to our EMD team. With around 50 investment professionals, they believe that companies with robust ESG credentials are the ones best placed to deliver strong, risk-adjusted, long-term returns for bond investors. That’s why ESG considerations are at the heart of every decision they make. It also means they can compare companies and countries from across the expansive, disparate emerging markets.
Coming soon…
Over the next 12 weeks, we will take you through our approach to ESG and how it relates to our European Equity and EMD teams. First up – and to bring our ESG analysis to life – we detail two of our investments that typify our ethos. The first is a frontier emerging market stock – Georgia Capital. The second is an Italian energy firm – Enel.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
[1] ESG Shareholder Engagement and Downside Risk – European Corporate Governance Institute: Hoepner, Oikonomou, Sautner, Starks, Zhou (April 2020)
[2] HOW ESG ENGAGEMENT CREATES VALUE FOR INVESTORS AND COMPANIES - PRI, 2020
