ESG and the Sustainability of Competitive Advantage

A holistic approach to sustainability with respect to disruptive change, financial strength, environmental and social externalities and governance (ESG) helps us identify investment opportunities.

ESG is a Component of Quality

We believe that ESG factors are integral to assessing the quality of a company and thus are a vital part of our investment process. When we formulate our investment thesis on the quality of a company, we ask three key questions¹ to determine the sustainability of competitive advantage and how it can be monetized through growth:

Is the company a disruptor or is it insulated from disruptive change?
Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage?
Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?

ESG FACTORS MAY MATERIALLY IMPACT INVESTMENT RISK AND REWARD. Companies are increasingly confronted with environmental issues, social factors and relationships with regulators and the communities in which they operate. In this context, managing ESG factors is simply part of sustaining competitive advantage in today’s economy.

ESG EXTERNALITIES MAY NOT BE NOT FULLY PRICED INTO THE VALUE OF COMPANIES. When companies externalize the price of environmental and social issues upon the communities in which they operate, they are by definition over-monetized—earning excess profits because the costs of externalities are not borne by the company. Investors risk paying the price when such excess is corrected and environmental and social costs are internalized to the company income statement.

ESG RISK EVENTS HAVE MATERIALLY DETRACTED FROM PERFORMANCE. In recent years, shareholders have suffered substantial losses following ESG risk events—while there is no silver bullet to avoid such catastrophes, we believe that incorporating ESG analysis can mitigate these risks.

Our Quality Assessment of Companies Has Always Incorporated Governance

Long-Term Ownership Mindset

We seek to own big ideas that win over time. Over extended time horizons, we believe that ESG risks are more likely to materialize and externalities are more likely to be priced into the value of securities. Therefore, we continue to innovate and evolve our process and believe that integrating ESG within our investment analysis improves the investment risk and reward profile of client portfolios.

Kristian Heugh

Managing Director

Marc Fox

Executive Director

ESG and the Sustainability of Competitive Advantage

¹ The information presented represents how the investment team generally applies their investment processes under normal market conditions.

RISK CONSIDERATIONS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in these portfolios. Please be aware that these portfolios may be subject to certain additional risks. In general, equity securities’ values also fluctuate in response to activities specific to a company.

Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds (ETFs), the portfolio absorbs both its own expenses and those of the ETFs it invests in. Supply and demand for ETFs may not be correlated to that of the underlying securities. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets.

Asia market entails liquidity risk due to the small markets and low trading volume in many countries. In addition, companies in the region tend to be volatile and there is a significant possibility of loss. Furthermore, because the strategy concentrates in a single region of the world, performance may be more volatile than a global strategy.

Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk).

Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks.

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IMPORTANT INFORMATION

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There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

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