Investment Integration

Governance, social and environmental issues are key drivers of investment value.  Companies that fail to manage their environmental and social impact effectively, or fail to adopt robust ethical policies and governance practices, are likely to suffer either direct financial harm or damage to their reputation. By contrast, companies that manage these issues well are likely to benefit by cutting costs, winning new contracts, building their market share, and gaining the trust of consumers and regulators. 

At Insight, we believe that asset managers should consider, as a matter of course, both the drivers of social, ethical and environmental change that influence companies’ long-term success and how effectively companies manage those issues. Two of the key inputs to our investment decision-making process are thematic analysis and company-specific (or fundamental) analysis. Our Investor Responsibility team provides input to both of these areas, to ensure that we properly account for these drivers and company responses in our company and portfolio analysis.

Thematic analysis

Businesses are always subject to societal expectations that change over time. In recent years, it has become clear that society’s expectations of business have become more complex and are stronger than ever before. They have therefore become critical determinants of business success.

These strengthening expectations pose two key challenges to business. First, they extend beyond what has traditionally been seen as the boundary of business responsibility (i.e. to produce the goods and services demanded by customers, to make appropriate returns for investors, to comply with the law). Secondly, they extend the range of a firm’s stakeholders from core groups to which companies are used to responding – such as customers, employees and regulators – to encompass actors such as non-governmental organisations and wider society. Some of these new requirements – such as reductions in greenhouse gas emissions and energy efficiency – have already started to be addressed by legislation. Others – such as responsibilities to ‘treat customers fairly’ – have yet to be formally codified in regulations, but are increasingly part of stakeholders’ expectations of companies.

These changes in expectations are not necessarily bad news. While some companies have been adversely affected (through, for example, litigation or falling demand for their merchandise), others have been able to benefit, for example, by developing products that are more environmentally friendly or healthier. 

Insight’s Investor Responsibility team has particular expertise in researching social, environmental and ethical themes. The team’s research allows us to analyse whether there are risks in our portfolios that more traditional forms of financial analysis may not identify and to position our portfolios to benefit from changes. For example, several sectors such as electricity, oil and gas and cement are exposed to policy measures directed at reducing greenhouse gas emissions. Moreover, given that the effect of these policy measures is likely to increase the cost of electricity, there may be knock-on effects for heavy electricity users such as retailers.  There may also be opportunities for companies that provide renewable energy or that are involved in activities such as emissions trading. 

A broad range of themes are analysed by the portfolio managers, in conjunction with the research analysts and senior members of the Investor Responsibility team to identify those most suitable for further research. Specific ideas are then subject to detailed fundamental analysis so as to understand, for example, how a chosen thematic driver is likely to affect the cash flow return and other financial measures of companies’ success.

Company-focused analysis

Our Investor Responsibility team has in-depth knowledge of many of the key corporate governance and corporate responsibility issues faced by companies. This knowledge is a key input to our analysts’ assessments of companies and our fund managers’ decisions on stock selection. Recent examples where our Investor Responsibility team has contributed to our analysis of specific stocks include:

• How are particular food companies addressing consumer health issues? Are those issues directly affecting companies’ revenues, margins and profits?
  
• How are airlines responding to the increasing regulatory and other pressures to reduce their greenhouse gas emissions?  How will regulatory changes affect airlines’ cashflows and profits?
  
• How are oil, gas and mining companies addressing local communities’ concerns and human rights principles? Are companies’ abilities to manage these issues likely to impact on their ability to access new concessions or projects?
  
• Are companies ensuring that directors’ interests are properly aligned with those of shareholders?  Are remuneration arrangements encouraging directors to behave recklessly or without due regard for the long-term success of the business?