As fundamental long-term contrarian value investors, we consider it an important part of company analysis to assess corporate governance, as well as the management of social and environmental issues. This forms part of our risk assessment of business fundamentals. We believe that ignoring ESG factors may lead to an incomplete understanding of the risks to an investment case, and may consequently result in the wrong investment decisions. Indeed, we believe that successful integration of ESG factors can contribute positively to the risk-adjusted returns achieved by the investments we make on our clients’ behalf.
Our starting point is not to exclude any particular sectors or countries unless excluded in individual managed accounts by the clients concerned. However we do avoid companies about which we have serious governance concerns, and companies in which we have concerns about business being conducted in an unethical manner, unless it is clear that such concerns have been or are being dealt with by management and any shortcomings have been addressed.
Once we become shareholders, it is our responsibility to continue to monitor any relevant ESG issues, and to engage with management where appropriate. We believe responsible ownership is a necessary part of our fiduciary duty.
OP was listed as a signatory to the 2020 UK Stewardship Code in September 2021 and is a signatory to UN Principles for Responsible Investment (PRI) with a four-star rating across all categories for our 2021 submission.
In this context, ESG factors are integrated into our investment process, at the idea generation stage and throughout the investment horizon. As long-term investors, this may span over several years. This is reflected in key investment notes, where there is a dedicated section for analysing relevant ESG issues.
ESG incidents are identified by either portfolio managers, analysts or by MSCI, our third party provider of ESG research, data and controversy monitoring. Issues are assessed by the wider investment team with additional oversight from the OP Stewardship Committee. Managing an ESG incident is done on a case-by-case basis and will depend on the materiality of the incident. In fact, ESG-related issues often provide us with investment opportunities where we can see an improvement in such issues playing a role in the recovery in the results and perceptions of a company and its share price.
While it is important to understand how we integrate ESG into our process, it is equally important to understand the elements of a broader sustainable investment approach that our approach does not incorporate. For example, our value-driven, index-agnostic approach makes it incompatible with “impact” investment where investors actively seek a social or environmental return separate from, or in addition to, a financial return.
Climate change is one of the most significant challenges facing the world today and we are committed to playing our part in helping the world lower harmful emissions to net zero by 2050 in line with the recommendations from the Paris Agreement. In 2019, we joined Climate Action 100+ and the Institutional Investors Group on Climate Change and most recently we became signatories of the 2021 Global Investor Statement to Governments on the Climate Crisis. We will engage with the companies in which we invest if a company has yet to commit to net zero emissions by 2050 or appears to be slipping in their roadmap to achieve that goal. In our own operations, we began measuring our own carbon emissions in 2020 and we commit to buy carbon offsets for more than 100% of our gross emissions each year.
We are also supporters of the Taskforce on Climate-related Financial Disclosure (TCFD) and we are integrating their recommendations into our company engagements and research process.
One important point to note is that while we aim to see individual companies improve their level and management of carbon emissions, the concentrated, index-agnostic nature of our investment approach means that the carbon footprint of the portfolio overall will be dictated by the mix of stocks we hold at any one time. The carbon footprint of the portfolio overall may shift significantly with individual purchase and sales. For this reason, we do not believe that tracking our portfolio-level emissions footprint is sensible.
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