A sustainable approach to equity investing

• Our revamped equity investment process embeds a sustainable approach at every step – from the investment universe we use, throughout the research process and in portfolio modelling, as well as when exercising our shareholder rights to vote and engage with companies.
• We’ve based our approach on a series of principles, and we use additional information about sustainability to enhance our analysis and expand our understanding of investment risk and opportunities. This sets us apart from investment managers that simply exclude investments which don’t meet their sustainability criteria.
• To support our new equity investment process, we’ve also launched a proprietary tool that provides sustainability profiles for thousands of public companies.

As part of our group investment universe definition, which we derive from internal and external equity research analysts, we include a few exclusions. They are hard rules that prohibit us from buying a given security. Because we follow a principles-based approach, we seek to minimise the number of exclusions. Instead, where questionable corporate behaviour exists, we first analyse it before making a decision – a case of thinking before acting. Regardless, there are times when corporate behaviour is of dubious legality and / or its existence creates insurmountable risks to an investment. We exclude those companies involved in controversial weapons, subject to EU arms embargoes, and those that are non-compliant with the UN Global Compact and unlikely to respond to constructive engagement.

When building equity portfolios, the interaction between holdings is as important as each individual security selection. We consider overweights and underweights relative to sector and country benchmarks, as well as tilts to factor exposures – such as growth or quality. In addition to these financial metrics, before inclusion in a model portfolio, we consider a number of sustainable criteria (figure 5).

We screen potential portfolio candidates using data from primary analysis as well as corporate disclosures across over 10,000 companies with up to 100 data points per company. Because we follow an approach that’s based on principles rather than rules, when a company performs poorly on one or more of the sustainable criteria, we choose to perform additional analysis on the specific issue, rather than immediately excluding the company. This allows us to either confirm or contradict our screen’s concerns. When the additional analysis yields a favourable outcome, we include the stock in portfolios. If we’re still concerned then we don’t invest.

This progressive approach to portfolio modelling may lead us to identify stocks that are undergoing material sustainability improvement or even entire business model transformation – changes that can be great for people and the planet and also for investment returns. We record this due diligence and company analysis, which is essential for minimising sustainable-related idiosyncratic downside risks; explaining the rationale for our holdings; and protecting our reputation as a credible sustainable investor.

In order to integrate sustainable considerations into the research and portfolio modelling process, it is essential to have high-quality and assessable data. We’ve constructed sustainability profiles for thousands of companies by drawing on leading frameworks, such as the Sustainable Accounting Standards Board, internal expertise and trusted data suppliers.

The profiles highlight any differences between the sustainability of a company’s products and services, and how well it manages its most relevant sustainability risks and opportunities. For example, Danone operates in the packaged food industry, which faces some fundamental sustainability challenges, such as nutritional content, water risks, disposable plastics and animal welfare. However, the company manages its sustainability risks and opportunities very well, and has an impressive record on issues such as product quality, input material and disposal practises, and supply chain management.

The profiles also include:

• a summary of recent controversies – unfavourable incidents that have entered the public domain;
• a range of common statistics on gender diversity, carbon emissions, and water withdrawal - presented with everyday equivalents (such as flights for carbon emissions); and
• whether the company is involved in commonly questioned activities, such as thermal coal or nuclear weapons.

The profiles serve as a base from which we analyse equities. We also use them to obtain company sustainability snapshots and to answer key questions such as “Is the company involved in thermal coal?” or “What percentage of the management team is female?”