Discovering Stocks for Your Sustainable Investing Goals

Sustainability means different things to different people. So how can an investor know whether a sustainable equity fund is truly aligned with their responsibility ethos and investing goals? Start by asking the following three questions.

1. What Does Sustainability Mean to You?

Responsible investing is a personal journey. People have different environmental and social priorities, and different investment approaches. Some may prefer to positively screen a benchmark for companies with certain attributes, such as a low carbon footprint or high scores on diversity and inclusion. Others might seek a portfolio that actively invests in companies whose products or services contribute toward improving environmental and social outcomes. But not every portfolio clearly explains how it integrates environmental, social and governance (ESG) considerations into its sustainable investing process.

Our Sustainable Thematic Equity portfolios have a coherent philosophy, strategy and process for finding companies that generate positive environmental or social outcomes and offer strong return potential. Based on this mindset, we’ve developed a practical plan to translate the United Nations Sustainable Development Goals (UNSDGs) into actionable investment ideas through three themes: Climate, Health and Empowerment.

These broad themes are a starting point for discovering specific opportunities. Within each category, we've identified 12 sub-themes. For example, within climate, sub-themes include cleaner energy generation, resource efficiency and sustainable transportation. From these sub-themes, we identify key products and services that will contribute to the achievement of the SDG sub-targets. Then, we identify companies that make and sell these products and services, which become our investment universe. Our selected themes and sub-themes rank among some of the most important issues that the world is facing, with products and services that are likely to enjoy strong growth potential, even in challenging macroeconomic conditions (Display). As a result, they represent a massive long-term social and investment opportunity that we believe aligns with many investors’ sustainability priorities. 

2. How Are ESG Factors Considered in the Investment Process?

ESG has become synonymous with responsible investing. But a catchy acronym doesn’t create a clear process. In our view, ESG factors should be viewed as an integral part of the value proposition for any company. It’s impossible to value a company without considering ESG factors, in our view. From climate-change risk to diversity to good governance, ESG factors can materially influence a company’s financial outcomes and should be meaningfully incorporated in an investor’s valuation process.

Today, many investors rely on third-party ESG ratings to evaluate a company’s sustainability. While ESG ratings can play an important role in a sustainable investing process, they are also flawed. Since they lack standard methodologies, ESG ratings of companies often vary dramatically between agencies. And ESG ratings are based on publicly available information, so they tend to reward companies that can meet reporting criteria—instead of best practice.

Our Sustainable Thematic Equity Portfolios independently quantify ESG factors at the company level. We conduct our own research to develop estimates of five-year return potential while identifying and quantifying risks, and incorporating material ESG factors in the investment process.

3. Are Engagement Initiatives Part of the Strategy?

Investing in a sustainable company’s stock won’t lead to change on its own. But shareholders enjoy a seat at the table with management—which provides many routes to encouraging meaningful change in corporate behaviour. Real change doesn’t happen overnight. It takes time, patience and multiple efforts over years to foster positive change, often on controversial issues.

In 2021, our Sustainable Thematic Equity portfolio team conducted 104 engagements with management teams from 60 individual companies on 219 ESG issues. Our efforts aim to support the social value creation of a company’s behaviour and its products. Engagement topics included executive pay, health and safety issues, carbon emissions, diversity and inclusion and organizational culture. As shareholders and active owners, we continually engage with management teams on material ESG and financial issues.

To us, engagement is about forming a productive partnership with management aimed at making progress in a variety of areas over the long term. We develop relationships with management that allow us to wield influence through dialogue and from a position of mutual respect. We believe this type of approach is often more effective at persuading companies to take the right steps toward a more sustainable future than taking a combative stance. And it’s the best way to focus on companies that are actively devoted to improving ESG practices—contributing to positive social outcomes, as well as increasing economic value.

Portfolio managers have a duty to demonstrate how their day-to-day portfolio-management approach supports an ESG-focused agenda. In our Sustainable Thematic Equity portfolios, we’ve honed a disciplined process over several years that strives to deliver improved outcomes for clients by finding better stocks for a better world.