Sustainable Investing — We’ve Been Having It
Sustainable investing has become the latest hot investment trend, with a global proliferation of funds promoting environmental, social and governance (ESG) outcomes. Managing director PAUL CLUER notes that Foord has always integrated ESG thinking into its investment process.
Sustainable investing uses ESG factors to evaluate investments in addition to normal financial risk-return metrics. The expectation is that well-governed businesses that strive to reduce their carbon footprints and promote socially progressive causes are best positioned to grow.
With a stellar 40-year track record of successful investing, this is not new news to Foord. As long-term investors, the enduring sustainability of income streams has always been fundamental to Foord’s investment philosophy. As the man from the Vodacom ad would say, “We’ve been having it.”
Foord has always considered sustainability factors in its formal macro view, economic and earnings forecasts, probability analysis and top-down asset allocation. Foord also uses ESG factors as a subjective measure to rank attractively priced companies or when evaluating management of investee companies.
The firm has nevertheless improved the rigour, recording and reporting of its ESG research and ESG policy. Some of this relates to investor demand and some to regulatory initiatives, including in the EU where the Foord global funds are domiciled.
We now formally record an ESG risk score for the companies in which we are invested. Foord subscribes to several leading ESG risk scoring services. This includes a leading South African research unit and a leading global unit. The investment team may also calculate its own risk score using a probability/outcome ESG risk scoring matrix.
What are the implications for the investment portfolios of having scored ESG risks at security level? I will be frank in confessing that we do not manage these ESG risks by applying aggregate limits on specific economic sectors, such as fossil fuels or fertilisers. Nor do we set caps, for example on carbon emissions, for our investment portfolios.
Foord does, however, commit to incrementally improve the individual and aggregate ESG risk scores for its portfolio investments. How we do this depends on how we categorise the stock-level risks. We categorise investments into three broad risk groups: negligible to low ESG risks, medium to high ESG risks and severe ESG risks.
We undertake to monitor the risk scores of companies assessed as having negligible to low risks, to ensure the score does not deteriorate. It is worthwhile noting here that these are point-in-time ratings. They will move over time, which means risk scores may deteriorate as well as improve.
For medium or high risk scores, we commit to influencing investee entities to incrementally promote improved ESG outcomes. This can take the form of management engagement (which is common and widespread) or voting on formal resolutions put to shareholders on ESG issues. Management engagement is behind-the-scenes shareholder activism. Voting on resolutions is captured in our proxy voting records, which we disclose to investors.
We will avoid investing into counters with severe risks. We will carefully consider divesting from counters already owned in the portfolio where ESG scores deteriorate to unacceptable levels. Finally, we undertake to report to investors on ESG developments and specifically regarding the proxy voting record. We do this in our annual Stewardship Report which is carried on our website.
What are the early take-aways from this risk scoring activity? Firstly, scoring of non-equity investments is less advanced than for companies. Equity funds have more robust scores with more instruments covered than multi-asset funds.
Secondly, the Foord funds score broadly in line with peer groups and benchmarks on overall ESG scores. This is to be expected in a market as small as South Africa’s, with limited choice amongst a shrinking pool of listed investments.
Thirdly, most of the risk comes from the S (social) pillar of the ESG risk score, followed by G (governance). While we tend to think of ESG as a proxy for environmental risks, the S and G pillars cover the gamut of other risks: from labour standards, diversity, data privacy and animal testing, to lobbying, corruption and remuneration.
Finally, the Foord funds score well on the E (environmental) pillar risk exposures. The Foord global funds and Foord Balanced Fund qualify for global funds rating service Morningstar’s ‘Low Carbon DesignationTM’ badge due to low carbon risk and fossil fuel involvement scores. The Foord Equity Fund in South Africa narrowly misses the qualification criteria, but has about half the JSE’s resource-heavy level of fossil fuel involvement. Sadly, Morningstar has insufficient coverage of the other Foord funds to credibly rate them in this area.
For now, we will publish Morningstar’s Low Carbon DesignationTM badges on the fact sheets of qualifying funds, but will not otherwise publish fund or component scores. ESG asks investors to grapple with complex issues to which there are no obvious answers—for example, is saving human lives less important than animal welfare or checking evil pharmaceutical profiteers?
We don’t have a firm view on this and many other equally hard questions. Nor should we be the bastions of these trade-off quandaries as fund managers. We do, however, undertake to score, monitor, engage and vote to improve ESG outcomes and to avoid securities where the risk is untenable.