our three-pillar approach.

We use a three-pillar approach to see which firms are best positioned to benefit from the significant opportunities of The Sustainability Revolution. It assesses the sustainability of a company’s financial model, business practices and business models.

 

1. Sustainability of a company’s financial model

The starting point for any investment is the financial viability of the company, whatever the asset class.

With equities, for example, we look to identify companies that can generate excess economic returns. That means being capital-efficient, cash-generative and able to balance their books independently from capital markets.

In credit, we assess the overall solvency of a company. We do this by looking at their financial data to determine their fundamental credit quality, and their ability to pay back debt and refinance. In contrast to traditional market-cap benchmarks, our starting point is the quality of debt, not the quantity.

 

2. Sustainability of a company’s business practices

We believe that for a company to deliver long-term value, it needs to be just as focused on its business practices as on its financial performance. In our view, business practices drive financials  in the same way that revenues or costs would. Businesses need to focus on the entire ecosystem of stakeholders including regulators, shareholders, employees, clients, suppliers, the environment and the local community.

Having programmes in place to address gender diversity, adhering to best practice on board composition, having robust policies in place to ensure the health and safety of employees, and minimising environmental impact are all part of the company’s business practices.

Tools.

We use several tools to assess the sustainability of a company’s business practices:

Long-term metrics – ESG Metrics

We use 115 distinct, identifiable and credible data points to determine whether companies are aligned with Environmental, Social and Governance best practice, making progress in adapting to the transition, and have business practices that are well positioned for the likely direction of future regulation.

We collect, verify and enhance large amounts of raw data concerning business practices. We collect non-financial data at the most granular level possible from a range of traditional and alternative sources. Our portfolio managers then integrate this data into their investment process.

The raw data also allows us to carry out additional forward-looking analysis and identify whether companies are talkers, doers or achievers when it comes to sustainability.

Short-term metrics – controversies

We look at companies’ exposure to controversies and the severity of those issues as a means of managing portfolio risk.

Impact metrics

We also analyse companies’ carbon emissions and water consumption. This helps us to understand how companies are trying to improve their business practices in a carbon- and water-challenged economy.

 

3. Sustainability of a company’s business model

We look at the sustainability of a company’s business model in the context of the long-term transformative trends of a global economy that is transitioning towards a more sustainable model. How well is the company positioned to take advantage of the opportunities the transition presents? This forward-looking analysis is a critical step in understanding whether the company’s performance is repeatable and sustainable over the long term. It all starts with the mega-trends that will shape our economic and social outcomes over the same timeframe.

We believe that five mega-trends are driving the Sustainability Revolution:

✔ Demographics

✔ Climate Change

✔ Natural Resources

✔ Digital Revolution

✔ Inequality

Within each of these mega trends, we map the likely path of future development to better understand which sectors will be affected and how. This, in turn, allows us to identify opportunities that we can translate into investment themes.