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Sustainability is part of the investment process
Beyond this, we seek to incorporate material sustainability issues into every investment case, including climate-related risks and opportunities. We will not make any investments unless we have a clear view and the extent of our clarity will subsequently influence the conviction we have in an investment case through position sizing and our assessment of the potential upside.
For example, if buying into an insurance company, our portfolio managers will be mindful of its exposure to risks related to climate change and rising sea levels. We will also evaluate the risks and opportunities of our exposure to fossil fuel, such as through oil and natural gas companies.
Positive change can take time
We also believe that ESG matters are not symmetrical in how they will influence an investment case. The trajectory of environmental improvements can be quite long, while the downside of an environmental accident can be immediate.
Likewise, the effect of social improvements is typically long-term in nature and will often exceed our usual investment horizon of 3-5 years. However, as with environmental fallout, social issues can cause short-term damage to a company’s reputation and valuation.
Governance is probably the ESG factor that has the most immediate impact on both a company’s upside and downside. A CEO or Chairman stepping down can trigger a positive re-rating or cause a sudden fall in a company’s share price. A poorly run company that does not treat its minority shareholders correctly deserves a lower valuation than one that is well run and respects its owners.