The evolution of environmental, social and governance (ESG) measures over the past 30 years has enabled a broader opportunity to understand the long-term sustainability of global companies.
In particular, over the past five years, the harmonisation and reliability of available ESG data has improved to the extent that fund managers can now assess the alpha correlations between key sustainability factors in a diversified portfolio. This data has allowed the integrated assessment of key ESG factors and the identification of sustainable companies that have repeatedly outperformed global markets since 2012.
Despite this, many investors still perceive the integration of ESG considerations as a restriction, which serves to exclude companies that do not meet specific non-financial criteria from a portfolio. Should this still be the case?
It is a question that is at the heart of the investment philosophy followed by Abbie Llewellyn-Waters, who runs Jupiter’s Global Sustainable Equity strategy. For her, the highest quality companies are those that have sustainable business models in economic, environmental and social terms.
Rather than only using traditional investment models, she enhances her analysis with sustainability measures to better assess the long-term intrinsic risk of a company, which in turn helps identify structurally sound global businesses. Importantly, in identifying companies with higher quality and sustainable, longer-term visions, Llewellyn-Waters looks to avoid businesses that only manage for short-term profit gain.
She explains: “In the strategy overall, we firstly aim to identify well-capitalised businesses with strong or improving cash flow characteristics and resilient operational efficiency. ESG metrics are used later to enhance this fundamental analysis and help us understand how a company is positioned on a forward basis.
“The rigorous research process takes into account financial analysis, and enhances that analysis with a range of strategic ESG considerations such as resource usage, workforce treatment, and cyber security to provide more insight into the quality of a company.
“Importantly, we do not use sustainability as a tool to exclude stocks from the investment selection process or direct us to areas to invest. It is a completely unconstrained approach.”