Sustainability, which includes good corporate governance, is embedded in how we invest on behalf of our clients, operate our business and interact with society. At Allan Gray Botswana, we have always considered environmental, social and governance (ESG) factors as part of our investment process. We believe this holistic approach can improve investment returns, manage risk better and assist our clients to act as responsible. In other words, it protects our clients’ interests as long-term investors.
ESG in the investment process
Our ESG research is conducted in-house and integrated into our investment analysis across all asset classes. Our investment analysts spend most of their time assessing the sustainable earnings level and quality of businesses. We consider many elements when assessing a company’s sustainability. These include the level of competition, whether capital is entering or leaving the industry, technological innovation and obsolescence, as well as ESG factors. For example, if a business performs poorly on sustainability measures, this is likely to affect its long-term profitability and thus our investment conviction. The outcome of unsustainable practices can manifest in many ways. Amongst others, a regulator may revoke the business’s licence to operate, customers may shun the business’s products and services and talented people may not want to work for the business.
The investment analysts research material ESG issues relating to the securities they cover and highlight these in their research reports. Key ESG issues are debated when we discuss investment opportunities and vote on “buy” or “sell” ratings. ESG risks are factored into company valuations, either by adjusting earnings or cash flow if the risk is quantifiable, or by valuing the company or division on a lower multiple if the downside risks are significant but uncertain.
We continue to monitor ESG factors once we are invested. This is crucial because they are dynamic and sometimes concerns may only arise once we are invested. We always aim to do what we believe is right. This does not mean taking a binary view on whether investments are good or bad and making related portfolio exclusions or inclusions. Instead, we undertake fact-based, in-depth and holistic research to inform our investment decisions.
In Botswana, we have found that governance issues are the most prevalent. Many may consider governance a soft topic when determining a company’s value, but we view it as one of the most important considerations. Businesses are led by people and people can be flawed. Management teams need structures that support and enable effective decision-making and provide oversight and counsel, particularly in challenging environments. The quality of the board in terms of the oversight they provide, as well as the incentive structures designed by the board to align management decision-making with the interests of long-term shareholders and the company, play a crucial role in this process.
Our Group Investment team includes a governance analyst and two environmental and social analysts, who, upon request, support the primary investment analysts by performing additional monitoring, in-depth research into identified risk areas and thematic ESG research. We also have a Research Library which monitors company-specific ESG news and shares relevant news items with the team. The Investment team uses multiple resources, as opposed to company reporting only, to ensure that we form a comprehensive view of material ESG issues.
Ownership responsibilities
The full economic benefit of the investment assets belongs to our clients, not to us. Clients have appointed Allan Gray to manage these investment portfolios on their behalf. We believe that good stewardship of our clients’ capital requires truly active ownership and that we can help investors exercise their ownership responsibilities in a diligent manner. We engage frequently and meaningfully with company boards and management teams on sustainability issues and think critically about how we recommend our clients vote at company shareholder meetings.
Allan Gray is a signatory to the United Nations-supported Principles for Responsible Investment (PRI) and supports the principles outlined in the Second Code for Responsible Investing in South Africa (CRISA 2).