Jupiter Global Sustainable Equities strategy manager Abbie Llewellyn-Waters explains how investors can understand ESG and how it can help deliver and drive long-term sustainability and returns
As the pensions industry prepares for new fiduciary duty regulations aimed at embedding environment, social and governance (ESG) considerations, trustees are being questioned as to whether they need to "rethink" their perception of these investment tools.
For many trustees, ESG considerations are considered restrictive when it comes to the stock selection process, and some broadly underestimate the positive impact ESG metrics can have on investments over the long term.
The evolution of the universe over the past two decades has shown that ESG considerations have the potential to improve the fund management process in a number of ways.
There is an opportunity to move away from using ESG to determine where they can invest and instead use it as an aid to help build a better picture of investments as a whole.
As such, there is a need for trustees to rethink their understanding of ESG metrics overall.
Abbie Llewellyn-Waters, manager of the Jupiter Global Sustainable Equities strategy, explains: "Often, ESG data historically has focused on implementing ethical-based screens. More recently it has been more widely used on a screen, score and rank basis. We don't follow this approach.
"Why would we? We would never approach financial analysis with such homogeneous analysis. Instead, we look in depth at the key areas of materiality.
"We believe the focus needs to be on making sure that when trustees think about ESG funds, they truly understand the potential improvement on portfolios as a whole."
ESG versus sustainability
For Llewellyn-Waters, who uses a number of ESG data points in an unconstrained process on the Jupiter Global Sustainable Equities strategy, one of the most important things is to ensure trustees do not isolate ESG integration.
Her investment strategy aims to identify the highest quality companies leading the transition to a sustainable world economy. While ESG is a tool that is used to enhance analysis and assist the fund management team in understanding the overall sustainability of a company, the investment approach is designed to determine the long-term capital growth prospects of a stock. As such, economic sustainability always comes first in the stock selection process.
"ESG and sustainability are not the same thing. Within our fund we refer to sustainability in economic, environmental and societal terms. All three factors need to be considered over the long term. If a company does not have the economic sustainability to support itself, it won't matter how good that company is at recycling its waste. Therefore, we enhance our analysis with material ESG considerations to help understand the long-term sustainability of a business. A simple way to think about this approach would be that ESG is an input and sustainability is the output."
In particular, the team believe the economic growth of a company is underpinned by a sustainable business model and provides them with a broader insight into how the company will operate over the medium to long term.
In order to understand that trajectory in better detail, the team will use external factors around the environment, societal and governance areas to enhance the analytical process.
But even this analysis must be conducted on an individual company-by-company basis, rather than applying a "blanket ESG approach" norm that looks at all possible metrics, she explains.
"Historically, the perception of this area has been that it is restrictive rather than influencing. We concentrate on the relevant data to find higher quality companies - but we are yet to find a ‘perfect' stock - there isn't a single company in our portfolio that couldn't improve somewhere. We prioritise research areas on the basis of materiality. We want to understand the fibre of a company and how it thinks about its business over the long term. For instance, how it treats its employees delivers key insights into the quality of a company."
Long-termism
This type of investment style has a traditional quality-bias. Llewellyn-Waters believes the key for trustees exploring this area is to look for integration of ESG throughout the investment process and identify managers who know where to focus their analysis.
"Trustees should be confident their fund manager is using ESG data that is both relevant and material to the stocks they are investing in," she says.
Abbie Llewellyn-Waters is a global equities fund manager in Jupiter's Environment and Sustainability team
The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. This fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state.
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