The call for companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption, resonates in the corporate psyche. Environmental, social, and governance factors, commonly known as ESG, form part of the sustainability movement, which aims to not only protect the environment but also to reconcile the activity of current human generations with the needs of future generations.
At Equitile, we are optimists. We see that the world is becoming a better place; poverty is declining, and longevity is rising. On average, people are living longer healthier lives than their parents, and generally doing so with improved rights and freedoms. We recognise that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed environmental, social and economic systems, hence in incorporating ESG we take actions that advance societal goals.
However, to date, improved living standards have been achieved, in part, at the expense of environmental degradation. In the long run, we believe it is our duty to rectify this situation, achieving sustainable economic growth that can be enjoyed by future generations. We believe that companies with good environmental, social and governance (ESG) practices will play a lead role, contributing positively to sustainable growth, and therefore thrive.
At the last count, companies in our Resilience Fund have a combined annual revenue close to US$1.8 trillion – that represents two per cent of global GDP. Collectively, our portfolio companies have a significant impact on how the world is shaped. It is our fiduciary duty therefore to understand, as best we can, the impacts and influences these companies have on the environment and society, for better and for worse. At Equitile, we find that companies who take these considerations into their decision-making processes decrease downside risk and maximize sustainable, long term value creation. How we invest today inexorably shapes tomorrow’s world, and as a signatory to the United Nations Principles for Responsible Investment (PRI), it is on us to demonstrate how we ourselves embrace that responsibility.
With its clear link to financial performance, a good governance factor is of prime importance for us. Additionally, we place emphasis on analysing environmental and social criteria that will facilitate top-line growth, reduce costs, minimise regulatory and legal interventions, increase high quality employee retention and productivity, and optimise investment and capital expenditures in our Fund companies.
All companies exist in the physical world and have impacts on and are impacted by the environment in which they operate. This context can provide great threats and opportunities for innovation. We see innovation as a prerequisite of sustainable growth, permitting improved productivity, allowing companies to add more economic value using fewer resources. We therefore search for companies with a proactive environmental lens, helping make the economy more efficient while also, proportionately, striving to reduce their own environmental impact.
All companies exist within a wider ecosystem encompassing their workers, customers, suppliers, and society at large. We believe the most resilient and successful companies are ones which consider all these respective stakeholders’ prosperity. This means we only invest in companies providing a product or service which is beneficial to society and doing so in a responsible manner, with healthy relationships between itself and its customers, workers and suppliers. If our research process raises concerns of an ethical nature these are referred to our governance committee consisting of three Equitile board members.
In the long run, no company can prosper without high quality governance and a healthy corporate culture. It must treat all its employees fairly and without discrimination, it must conduct its business legally, and it must compensate its management and staff appropriately, fostering an alignment of interests with shareholders. We do not tolerate companies where management endanger both the capital of their shareholders and the jobs of their workers by using risky financial manoeuvres or opaque decision-making processes. The financial management of the firm must be conducted in a responsible manner, allowing the firm to invest for future growth while surviving inevitable business setbacks.
We favour management teams that can develop sound observations about their industries, and which make strong strategic choices that enable them to adapt and thrive in a changing market with a focus on superior execution.