In today’s world, we believe ESG plays a key role in the analysis of a company’s operational stability. London & Capital’s ESG approach is folded into our investment strategy and the primary purpose remains to control downside risk and preserve capital in adverse economic conditions and financial market stress.
There are three layers to our ESG proposition:
01 Integration
Explicitly and systematically including ESG issues within our proven investment analysis and decisions, to better manage risks and improve returns. We incorporate ESG information and data into investment decisions to help enhance risk-adjusted returns.
Our ESG integration approach has two layers.
The first is that we have developed an in-house scoring methodology, which acts as a qualitative overlay to our existing investment process to inform investment decisions.
The second is that ESG considerations are appropriately incorporated into our bottom-up due diligence with each company’s and industry’s specific ESG considerations reviewed, updated and evaluated by our investment teams.
In terms of our scoring methodology, we use data from external providers as well as our own analysis of annual reports that incorporate the key qualitative attributes behind a company’s ESG standards. Examples of these issues include:
Environmental – Climate Change, Social – Human Rights, Governance – Business Integrity
Not every issue is relevant for every company or industry, but the analysis ends by assigning an ESG score for each company in each category. The scores range from 0 to 100% and, depending on the client’s preference for ESG integration, a minimum score can then be implemented to “pass” this initial screen, as well as assigning an overall portfolio score, allowing clients’ control over the level of ESG their portfolio holds.
To do this, we capture the following information:
Of course, not all businesses are the same when it comes to evaluating E, S and G, as such, it is not appropriate to assign equal weightings to E, S and G for all companies.
We apply our own proprietorial weightings to each company’s E, S, and G score based on the sector it belongs to. By applying these factor weightings, we can provide a more relevant ESG score and put companies onto a more level playing field.
It is important to note that our aim here is to complement our proven investment process by incorporating ESG factors into our current investment analysis. Critically, ESG factors do not drive our investment process but rather forms part of our overall investment process – it is a thread that is woven throughout our involvement in a company.
02 Negative Screening
The negative screening approach is something we work directly with clients to achieve and can be tailored according to clients’ values. For example, some clients specifically exclude exposure to companies who generate a meaningful level of revenue from tobacco or arms manufacturing. But these exclusions can also address environmental issues such as excluding exposure to companies involved in fossil fuel exploration or extraction, nuclear power or where they have been implicated in any other ecological disaster.
This is a process which takes place whilst gathering initial client requirements and then is continuously folded this into the review process, allowing clients portfolio to change and adapt as appropriate.
03 Thematic Investing
As ESG evolves within the investment marketplace and these non-financial aspects impact future returns and risks of companies, London & Capital are constantly considering a third layer of ESG incorporation via thematic investment strategies that may benefit from ESG trends. These strategies are developed by each of our asset class teams to capture investment opportunities that have a positive impact on the environment or society.
Conclusion
Throughout the history of financial markets, investors have always needed to adapt their approach to changing market dynamics. We believe that we are at a point where ESG considerations are becoming material enough to affect investing decisions, this will continue to evolve as ESG data matures, materiality comes into focus, and regulatory frameworks push to expand market awareness. Our ESG-aware approach can provide us with a better ability to uncover hidden risks as well as increase opportunities to enhance returns.
We work with clients to set their own level of ESG integration according to their interests.
