The Sustainable & Responsible Equity fund
The Sustainable & Responsible Equity fund, managed by the Global Opportunities team at London-based investment firm Impax Asset Management, is focused on the long-term growth opportunity arising from the transition to a more sustainable economy.
The Sustainable & Responsible Equity fund, managed by the Global Opportunities team at London-based investment firm Impax Asset Management, is focused on the long-term growth opportunity arising from the transition to a more sustainable economy. The fund invests in a relatively concentrated portfolio of 35–45 global businesses with a market capitalisation of at least US$1 billion.
These businesses demonstrate sustainable competitive advantages and form a high-conviction, low-turnover portfolio which aims to provide investors with long-term capital growth. Impax believes that factors such as demographic change, resource scarcity, inadequate infrastructure and environmental constraints will be the key drivers of growth for selected companies over the long term. Companies that maintain a narrow focus on the creation of shareholder value and ignore wider implications may be exposed to significant risk as a result of direct or indirect action from other stakeholders. In contrast, those companies that seek to consider the wider non-financial factors will improve their prospects for sustaining and expanding financial returns over the long term. Recognition of these factors in the transition towards a more sustainable global economy is likely to lead to better growth prospects for well-positioned companies.
Investment managers typically use screens or filters to reduce the circa 65,000 equities listed on exchanges globally to a subset that can be effectively analysed further. The team at Impax uses its own sustainability lens and the proprietary tools of Viper Analytics to find mispriced investment opportunities. The Impax sustainability lens is designed to identify sectors that may benefit from tailwinds or face a lower level of disruption risk in the transition to a more sustainable economy.
It helps quantify the sustainability-based opportunities and risks presented by potential investment ideas, enabling the manager to prioritise sectors for further investigation. Viper Analytics assesses stocks across a number of quality criteria, both quantitative and qualitative. This includes liquidity, return on invested capital, stability of returns, leverage and corporate controversies. This tool awards a quality score between 1 and 10 to each of the companies analysed; and enables the team to search for different financial characteristics alongside the risk and opportunity scores generated by the sustainability lens.
Positive inclusion, not negative screening
The approach adopted by the team at Impax is different to a traditional negative ethical screen. Impax seeks to identify which companies have the best long-term ideas, rather than excluding companies from the investable universe based on fixed criteria. Although not explicitly excluded from the fund, business activities typically omitted from traditional ethical investment strategies do not tend to feature within the opportunity set of Impax’s investment process. The team’s rigorous, integrated environmental, social and governance (ESG) analysis ensures that corporate governance concerns and controversies are identified at an early stage. Therefore, under normal market conditions, it is expected that the fund would not hold companies significantly involved in the extraction and/or refining of fossil fuels. The team also adheres to self-imposed, but strictly enforced, exclusionary guidelines regarding investing in companies that manufacture or sell weapons or tobacco products.
Impax assesses the most significant environmental or social risks for a company within its respective sector or industry. It looks for companies with strong ESG policies and processes to address these risks. It will favour companies that discuss and disclose their own assessments of the main ESG risks they face. It is therefore important to understand and assess the local standards and best practices in order to identify governance issues, potential risks and outlying factors. These factors, some of which are more applicable in certain countries and regions, include:
- Internal controls – disclosure and general transparency regarding governance structures
- Board structure and effectiveness – relevant experience, diversity, tenure and resolution disclosure
- Shareholder rights – AGM/EGM governance, proxy voting controls and dual share structures
- Ownership structure and control issues – anti-takeover mechanisms and threat of dominant shareholders
- Compensation and incentives – alignment with minority shareholder interests and disclosure
- Corporate behaviour, reputation and integrity
- Accounting practices – adoption of aggressive/conservative accounting practices, late filings and proxy voting Impax analyses a company’s ESG policies, processes and disclosures from a sector perspective; identifying the most material risks within each sector.
This may include:
- Health & safety vulnerabilities
- Labour constraints
- Pollution & waste management
- Supply chain dependencies
- Product liabilities
- Bribery & corruption
- Resource constraints
- Climate change
- Anti-trust regulations
The team seeks to identify companies that have addressed the material sector risks with strong processes and management systems.
Following completion of rigorous, stock-specific analysis, each company is monitored continually, and formally reviewed on an annual basis. Should a company be downgraded due to an increased ESG risk or controversy, the team will engage with the company to understand how it is managing these risks. If the team is not comfortable with these discussions, Impax may choose to divest from the position. Alternatively, Impax may retain the investment if they believe the company is taking the appropriate action to manage or remedy the situation.