For Stewart Investors sustainability is more than just corporate data distilled into alphanumeric ratings, sin scores or green ticks for easy consumption.
Pablo Berrutti, senior investment specialist with the global equities firm, said Stewart takes a more qualitative approach to building sustainable portfolios.
“Not everything that can be measured matters and not everything that matters can be measured,” Berrutti said.
He said the Stewart investment process relies more on qualitative assessments to understand the sustainable features of portfolio companies in ways that often elude number-crunchers.
“We look for demonstrable qualities rather than specific quantitative measurements,” Berrutti said. “It’s like putting the pieces of a jigsaw puzzle together.”
The corporate sustainability evidence might show up in balance sheet items such as capital expenditure on carbon transition goals, research and development spending or even tax minimisation strategies.
“We avoid companies that take short-cuts on tax,” he said. “The taxman always comes at some point and that compromises future earnings.”
But Stewart also puts great store on understanding the quality of management teams and their commitment to achieving stated sustainable goals.
“Ultimately, it is people who run businesses,” Berrutti said. “For example, a green energy company with poor management might not make a good investment.”
While Stewart judges corporate sustainability on the quality of both management teams and business “franchise”, the process also takes in traditional financial metrics.
In fact, against the rising trend of ESG investment specialisation, the firm treats sustainability and financials on an equal footing.
“We don’t have a separate sustainability team determining an ‘investable list’. All judgments are made by members of our investment team,” the Stewart website says.
The Sydney-based Berrutti, in NZ last week for the Responsible Investment Association of Australasia (RIAA) conference, said the manager looks for companies that “make more money and make the world a better place”.
And he said Stewart is also transparent about its sustainability claims, publishing assessments for every company in the portfolio on the website ‘explorer’ tool.
“We show evidence on why we think a company meets our sustainable development criteria and qualitative measures,” Berrutti said. “Ultimately, there’s a degree of subjectivity involved but the way to go is to be completely transparent. Our clients are then able to engage with us about whether they agree or not.”
The style also results in a more constructive dialogue with investors, and possibly regulators, than arguing about the effectiveness of negative screens.
“Negative screening starts with the idea that you should invest in everything and then take out what you don’t like,” he said. “We start with a blank sheet of paper and then find 60 or so companies with strong sustainable development qualities that we think will outperform over the long term – so that naturally excludes businesses like tobacco and fossil fuel firms.”
Rather than focusing on exclusions, Stewart puts greater effort, too, into sustainability research and corporate engagement on issues that often fall outside the mainstream.
Recently, the manager has led engagements with ASX-listed biotech firm, CSL, on human plasma collection policies in the US as well as driving an institutional collective approach to “conflict minerals” (essential elements for the green energy switch) and researching the impact on supply chains of small-hold farmers.
“We’re starting to see acceptance from investors that a robust sustainability process can be something other than simply relying on a number produced by a ratings company,” Berrutti said. “We have a more challenging story for investors, but I think a richer one.”
Founded in Edinburgh in 1988, Stewart Investors has almost $30 billion under management across various global equities strategies.
The manager has sourced about $135 million from NZ-based investors including $25 million in a recently launched portfolio investment entity (PIE) vehicle offered under the Apex Group NZ fund-hosting service.
Available on most NZ financial adviser platforms, the Stewart Investors Worldwide Leaders Sustainability Fund has also just joined the panel on the $125 million Aurora KiwiSaver scheme, which is currently updating its underlying investments.