Environmental, Social and Governance (ESG) considerations have gained prominence in investment circles over the last decade. NICK CURTIN explains how ESG principles have formed a part of Foord’s DNA for decades.
The United Nations-supported Principles of Responsible Investing (PRI) and the Code for Responsible Investing in South Africa (CRISA) are examples of voluntary codes aimed at encouraging investors and institutions to consider sustainability and governance issues. There are many asset managers and some large institutional investors that have loudly proclaimed their adherence to one or more ESG codes, largely to appease their pension fund investors or to gain some marketing edge over their peers.
Because non-financial factors can directly influence the long-term sustainability of a company’s future income streams, ESG factors have been part of Foord’s DNA since we first started managing money. Therefore, when analysing companies we need to consider the impact that ESG issues will have on valuations and to discern the true risk of permanent capital loss. In addition to being active shareholders, we know that understanding the long-term social, economic and geopolitical themes is crucial when building diversified, long-term portfolios.
By way of example, there is a notable socio-political response to the growing inequality divide globally. Combined with increasingly strained public finances in most parts of the world, the likely political response in the form of higher taxes on wealth will have material impacts on many industries and companies. Similarly, the regulatory pushback against multi-nationals shifting profits to friendlier tax jurisdictions will have to be factored in when forecasting long-term sustainable earnings. In the South African context, the introduction of a carbon tax will also have obvious ramifications for a number of industries and large companies. Importantly, these changes will also lead to opportunities.
Staying ahead of these secular trends and positioning accordingly is an essential part of the active investment management process. Getting these big calls right is a cornerstone of the Foord investment philosophy and an important part of the promise to protect and grow our investors’ savings over the long term in a responsible way.