Sustainability in a corporate context is a company’s ability to operate in a manner that does not damage the environment or deplete a resource. This concept not only represents a responsible approach to investing, it also preserves our communities’ values and as a business approach creates long-term shareholder value by capturing opportunities and managing risks that derive from the rapidly-evolving global economy.
As global economic growth shifts from the developed world to the BRIC countries (Brazil, Russia, India and China) these economies are experiencing rapid population growth, mass urbanisation and industrialisation – with all the potential dangers for the environment that these processes entail. In our view, sustainable investing is the recognition that non-financial factors can materially affect a company’s long-term performance. A systematic incorporation of these ‘non-financial’ factors into a disciplined, fundamental investment process can lead to a more accurate assessment of long-term corporate value, and ultimately enhance investment returns.
What do we mean by ‘non-financial’ factors? What follows is by no means a full list, but simply some examples to give the reader more of an idea of some of the issues that are taken into consideration when assessing these non-financial factors:
- quality of management
- corporate governance – practises such as transparency and disclosure, management accountability to shareholders, a company’s branding, image and reputation, new product developments, regulatory fines or litigation costs
- social side – how communities are supported or employees treated
We believe that sustainability leaders achieve long-term shareholder value by positioning their strategies to capture opportunities from these changes while at the same time successfully reducing and avoiding costs and risks.
Corporate sustainability recognises that companies are operating in an increasingly changing and challenging world. Globalisation and new political landscapes have combined with significant changes in populations, urbanisation, resource utilisation, climatic patterns and employee and consumer attitudes. Corporate sustainability looks to create long-term value by managing the risks and capturing the opportunities that result from these trends.
A focus on long-term structural change will become increasingly important in generating superior long-term investment performance. Understanding how different environmental, social and governance (ESG) factors can affect a company’s performance is part of that analysis, as these non-financial factors can have a major impact on a company’s bottom line. In part, this is because these issues carry the potential for material risk, including social and environmental damage and legal liability.
There is also evidence that corporate sustainability makes good business sense. Companies can boost profits by adhering to ESG principles. If, for example a company can save money by reducing waste, utilising raw materials more effectively and using less packaging, it is a win-win situation. It is good for the company’s profits, and good for the planet.
Academic research has identified a positive correlation between companies with high sustainability standing and their financial performance. This is because managers who understand the long-term risks facing their companies and industries will formulate a deeper understanding of the implications for long-term finances and profitability. A long-term investment horizon is critical in order to integrate ESG factors in to the investment process.
We believe ESG factors are relevant in all regions – emerging and developed. But because of the growing demographic and resource challenges, a more sustainable approach to economic development is particularly crucial in emerging markets. Many developing economies face rapidly growing populations, and these challenges force governments and companies alike to focus on a much more sustainable approach. A major problem is that in the past, rules and regulations have been either absent or lax, and where legislation does exist, enforcement has been inadequate. Add to that a lack of available information. Poor visibility and the time-consuming process that it takes to extract that information make the investment side of sustainability challenging as well.
We regard disclosure as an important step along the road to good ESG management because a decent level of disclosure highlights a company’s risk management capability. Disclosure is particularly crucial for those emerging market companies that compete globally, as they are subject to assessment of their abilities to comply with evolving international standards.
Many globally-orientated emerging markets companies are participating in the UN Global Compact. This is a framework for businesses committed to aligning their operations and strategies with 10 universally accepted principles in the areas of:
- human rights
- labour
- the environment
- anti-corruption
As the world’s largest global corporate citizenship initiative, the Global Compact is first and foremost concerned with exhibiting and building the social legitimacy of business and markets. Many other local regulations are also evolving rapidly, and with these will come stronger enforcement powers. One high-profile example is the plan by China to publish efficiency and conservation targets for all sectors.
