Long-Term Value for High Net Worth Investors in Responsible Investing
Protect your investments As ESG investing becomes an increasingly popular investment strategy, Jarislowsky Fraser explains how this method can be applied not only to institutional investors, but to high net worth individuals as well.
Institutional investors, such as universities, foundations and pension funds, are increasingly aware of the benefits of sustainable investing or integrating environmental, social and governance (ESG) opportunities and risks into their investment decision-making.
In fact, Ontario pension legislation recently included language about ESG integration. Individual investors should know that they too can incorporate sustainable investing into their portfolios.
ESG equals high quality business practices
Many asset managers equate ESG factors like good environmental stewardship, labour relations, and corporate governance with high quality businesses.
This has been the investment philosophy at Jarislowsky Fraser, an independent investment management firm that integrates ESG into its high quality, low risk investment philosophy and process, which is the foundation for all its client portfolios.
“We are bottom-up fundamental investors and we want to identify great businesses for the long term, and ESG is a very valuable lens to help us identify those businesses,” says Dan Hanson, CFA, Partner and Portfolio Manager at Jarislowsky Fraser.
The firm’s in-house research team considers fundamentals such as cash flow, profitability, and growth potential along with ESG factors in all its decisions. “Combining ESG criteria with fundamental analysis can be very informative to understanding the depth of the company’s competitive position and its prospects going forward,” says Hanson.
A customized approach
Whether selecting companies to invest in or building investment portfolios for its clients, Jarislowsky Fraser recognizes there’s no “one size fits all.”
With securities selection, evaluation criteria vary. “What’s material to one business in one sector is not necessarily material to another,” notes Hanson.
Metrics for a resource intensive business like energy or mining might focus on environmental criteria such as energy efficiency, emissions reduction, and health and safety standards, whereas those for a human capital intensive business like pharmaceuticals or software development might lean more towards social criteria such as employee attraction and retention rates. “This concept of materiality has recently gained a lot of traction in ESG investing and is core to our approach,” says Hanson.
Governance criteria tend to be more standardized. “As an investor you really need to have confidence in management, and also that management is being held to account by a board and a structure that creates that accountability — so the importance of good governance cuts through any kind of business,” says Hanson.
While ESG criteria help to identify sustainable competitive advantages, they can also help avoid risk. “If you have a culture of safety, transparency, and accountability, there’s less chance of an accident or bad news situation hitting the newspapers and causing the share price to fall,” says Hanson.
Jarislowsky Fraser has been working with groups like the Sustainability Accounting Standards Board, the Canadian Coalition for Good Governance, and the CDP (formerly, Carbon Disclosure Project) to develop a common language on ESG disclosures and standards, and to further promote transparency and accountability. “We take an engaged ownership approach with the companies in our portfolios, on behalf of our clients, and we think that aligns very appropriately with our long-term view,” says Hanson.
The customized approach extends to Jarislowsky Fraser’s client services. “We take a consultative approach, working with investors to understand their specific values and world views and tailoring the investments to reflect that,” says Mark Fattedad, Partner with Jarislowsky Fraser’s institutional and private wealth management practice. “We are a discretionary investment manager and have a fiduciary duty towards our clients, as stewards of their assets, to act in their best interests. We believe ESG integration helps us to find the best high quality businesses for our clients’ portfolios.”
As ESG moves further into the mainstream, more high net worth investors may wish to join the conversation. “High net worth individuals are asking for ESG because they see it as a way to reduce risk exposure, take advantage of innovation and growth opportunities, and obtain long-term value,” says Fattedad.