Responsible Investment: putting principles into practiceMonday, 10 May 2021
Sustainability in investment has attracted greater attention in recent years but seeking to invest in honestly managed companies with a long-term future providing useful goods and services is nothing new. We believe taking environmental, social and governance (“ESG”) issues into consideration helps to reduce risk and identify opportunities. We expect our external managers to integrate ESG factors into their investment processes, to engage with investee companies to encourage improvements and hold them to account when they fall short. This is the foundation for delivering good returns for shareholders as well as a better future for the planet and its people. Evolving best practice in this area is set out in the UN’s Principles for Responsible Investment, to which Witan became a signatory in February 2020 and to which all our managers are also signatories.
Historically, emerging markets have been one area where understanding if a company is practicing good corporate governance has been more difficult but of key importance. GQG Partners manages an emerging markets portfolio on behalf of Witan. Here Polyana da Costa, Partner at GQG, provides answers on how ESG is integrated into their investment process.
"We have a team of 15 traditional and non-traditional analysts. Within the investment team, amongst others we have former journalists. We have at least two pairs of eyes on any portfolio company and often that includes one of our non-traditional team members with a background in investigative journalism. Both teams obviously consider the long-term risks in their analysis, including ESG risks, but the non-traditional analysts focus on digging deeper on specific issues. This capacity for targeted investigation is well suited to ESG research as it can add much-needed context to the selective sustainability disclosures published by companies."
ANALYSIS OF ESG FACTORS
"We see ESG analysis as a natural part of the risk assessment process of investing. We have always focused on forward-looking quality, so naturally we have to understand the long-term sustainability of earnings in a business and the potential threats to that sustainability. We view the assessment of ESG risks as a material component of that process and therefore chose not to have a separate ESG team working in a silo. Instead, both our traditional and non-traditional analysts work together to identify potential ESG risks and weigh their materiality to the investment thesis. This approach integrates ESG into our long-term risk assessment for a company, but also lets the non-traditional team retain a focus on what we view as a key part of ESG, the culture and management of a company."
COMPANY CULTURE AND ESG
"We have found that when the quality of the management is strong, the social and environmental standing of the company tends to be positive and sincere. In our experience, a healthy corporate culture goes beyond just ESG issues and is a good indicator of a company’s quality and earnings potential. We dig into each aspect of ESG to identify potential issues to inform our assessment of the materiality of short, medium and long-term risks. We feel that companies with strong cultures do better in the long run. How is a strong culture defined? Well, that varies by company and sector. For example, an aggressive culture may not be ideal for a bank but it can be a positive for a tech company competing in an innovative environment. The other part is the quality of the management. Can you trust what management is telling you? Are there any red flags, unethical or illegal behaviour? These are all factors we consider and naturally they are key to ESG risks."
"I can’t name the company, but in one particular case our research revealed a serious lack of checks and balances within the governance of a company. The management had somehow gained credibility with investors because it had once partnered with Amazon. We heard reports of employees going months without pay and that employees had been posing as customers when investors toured the company. It was mind-blowing. We stayed away from the investment and the stock subsequently lost 95% of its value."
You can read more about Witan’s responsible investment policy here.
Issued and approved by Witan Investment Services Limited. Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.