ESG: Sustainable financial returns for long-term growth
Environmental Social and Governance considerations are becoming more important for investors. Adam Avigdori, Co-Manager of the BlackRock Income and Growth Investment Trust plc, discusses how they draw ESG analysis into their investment process
On the BlackRock Income and Growth Investment Trust, we are looking for companies that generate a high return on capital and can grow dividends over time.
In order for companies to do this, they need to score highly on a range of financial factors, but non-financial factors are equally important to ensure those returns are sustainable. This is where our environmental, social and governance (ESG) analysis comes in.
This part of our analysis has always been important. However, as issues such as climate change come under greater scrutiny from policymakers, consumers and regulators, we are conscious that shareholders are becoming increasingly sensitive about owning any company that isn’t actively managing the associated risks.
However, we have always felt that considering ESG factors is the best way to manage businesses over the long term for all stakeholders.
Whilst we have no direct ESG mandate, these factors have always been an integral part of our analysis.
In our 1,000+ company meetings each year, we seek to understand how companies are performing, the industry dynamics they face, what differentiates them versus their competitors and importantly how sustainable this competitive position is, and therefore how it is likely to evolve over time.
This research is complemented by our analysis of the ecosystem surrounding the company; understanding the company’s relationships with its customers, regulators, suppliers, employees and shareholders.
‘We believe that companies that promote sustainable relationships with all their stakeholders are better positioned to mitigate risks and to sustain their financial returns’
We believe that companies that promote sustainable relationships with all their stakeholders are better positioned to mitigate risks and to sustain their financial returns over the long term. Our analysis of the ecosystem highlights both the risks as well as the opportunities facing companies over the long term.
We are particularly interested in the growing interdependencies between stakeholders as the focus on ESG increases.
For example, a company may differentiate its products or services by reducing their environmental footprint.
However, this can also differentiate the company as an employer and influence its ability to attract and retain talent as employees are increasingly responsive to companies’ ESG practices.
This in turn can influence the financial factors as well as influence other stakeholders such as the shareholders and the cost of capital.
Beyond financial factors
As such, while analysis of financial factors such as its revenue growth, profitability, cash generation and allocation, the balance sheet and return on capital are vitally important, our analysis of ESG factors provides us with conviction that these returns are sustainable over the long term.
Within our environmental analysis, we consider companies that have low absolute and relative resource intensity and have a clear understanding of how they are using carbon and water. We like to see a company improving its resource efficiency and helping others to reduce their resource footprint.
‘We like to see a company improving its resource efficiency’
Our analysis of social factors includes looking for a commitment to high and improving standards of health and safety. We want to see robust management of human resources – a living wage, a good working environment, plus an analysis of labour practices along the supply chain.
Evidence of a sustainable relationship with both suppliers and customers is also vitally important for long-term growth.
‘Governance’ involves understanding a company’s risk management and mitigation processes, its relationship with regulators and its management remuneration strategy.
We want to ensure that a company’s capital allocation policies are supportive of its long-term strategy. Additionally, we look at the composition of the Board, including factors such as independence, diversity of tenure, experience, geography and gender.
In undertaking this ESG analysis, we are supported by BlackRock’s large internal team of ESG specialists. They provide us with data and insights to keep us well informed of sustainability considerations.
Armed with the necessary data and tools, we can bring this information into our investment processes.
Additionally, BlackRock has a large Stewardship team. We partner with our colleagues in Stewardship to engage with companies regularly. We believe this engagement helps align companies’ behaviours to maximise the potential for long-term shareholder value creation.
This trust aims to deliver long-term consistent growth in capital and income to our investors. We believe this analysis of ESG factors helps us deliver these dual goals for our shareholders. They are part and parcel of creating a sustainable business for the long term.
Unless otherwise stated all data is sourced from BlackRock as at November 2019.
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