However, there are limitations to ESG data and the data itself doesn’t explain why ESG matters.Ĭorporate Value: ESG factors influence value in many ways. If material, they will impact future returns and consequently corporate value, and hence it is the context behind why ESG might influence future returns that makes integrating ESG an essential part of being a fundamental investor.Ĭorrelation: There is increasing evidence of a strong correlation between companies with high ESG scores & strong financial performance. However, ESG factors are contingent liabilities or assets that aren’t standardised and are often difficult to measure. Like the balance sheet data, ESG ratings add value by providing a snap shot of a company’s status. The Four Pillars of Future Quality: Subjective Nature of Franchise & Management Quality We spend a great deal of our time on the analysis of these critical variables. We believe these future earnings are a reflection of the strength of both the company franchise and its management. However, the majority of a company’s value is a reflection of its future earnings – hence our focus on Future Quality. Some, such as the strength of a company’s balance sheet give a picture of financial health at a set date. There are four pillars to Future Quality investing, each contributing to the investment case. We have considered the growing body of academic research as well as our own investment experience ultimately concluding that ESG is an integral part of being a fundamental investor.
Executive Summary:īuilding on our Future Quality white paper this analysis frames how and why we integrate ESG factors into our investment process.
We believe this shift is secular and this paper explains how we add value for our clients by integrating ESG into all aspects of our investment process. These investors are increasingly asking how their return is generated. They will inherit billions of dollars saved by their baby-boomer parents and this new group of investors have different expectations as to how their money is managed. Wealthy individuals across generations are interested in investing for environmental or social impact, but Millennials are by far the most active in evaluating and indeed, demanding these strategies.
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