We believe that the privilege of investing capital carries with it a responsibility to try to secure a sustainable future. This goes well beyond a narrow consideration of ESG risks using third party metrics and decorative marketing.
As long-term Quality investors, we take a holistic approach to sustainability. This requires an in-depth proprietary assessment of the durability of a company’s business model and competitive advantages, the resilience of its financial model and the alignment of capital allocation decisions with the long-term interests of shareholders and key stakeholders.
This view of sustainability permeates through all our investment thinking and analysis and is fully embedded into our investment philosophy:
We believe:
We believe stakeholder relationships are not just a matter of corporate social responsibility, but a prerequisite for delivering long-term sustainable value. Successful relationships can provide critical business and customer intelligence, open new markets, reduce risk, improve supply-chain efficiency, build brand loyalty and reputation, and support creativity and innovation. They can lead to improved employee satisfaction, which itself can lead to enhanced productivity as well as talent retention and attraction.
Companies with sustainable business models, and business practices that support the society and environment in which they operate, can enhance their returns and cash flows, and lower their risk and cost of capital. Therefore, building and sustaining strong stakeholder relationships can itself be an enduring competitive advantage, supporting long-term value creation.
We do not apply any ESG screening methodology in the idea generation stage, given third party ESG data and analysis can be unreliable and/or incomplete. Our holistic approach to sustainability means that we are better placed to identify and assess material sustainability issues and opportunities in the research stage where we complete in-depth, fundamental analysis.
The Quality team uses a consistent framework for all our research, as outlined in Figure 1 below:
Figure 1: A consistent research framework
Sustainability factors are assessed through a stakeholder lens within each element of this framework:
Our research reports also include a dedicated section on sustainability that explicitly addresses these factors in detail, as can be seen from Figure 2.
Figure 2: Sample Sustainability section from a full research report
We aim to preserve and grow the real purchasing power of the assets entrusted to us by our clients over the long term. In fulfilling this purpose, we assume a stewardship role, including the effective exercise of our clients’ ownership rights. We monitor, evaluate and, if necessary, actively engage or withdraw investments, with the goal of creating and preserving sustainable value for our clients. Engagement is considered part of the initial due diligence process, prior to investment, and on an ongoing basis, to reduce risk and protect or enhance the value of an investment. We believe that once we invest, we assume a critical fiduciary responsibility on behalf of our clients. As part of this responsibility, we consistently exercise our proxy voting rights in company general meetings by either support or sanction.
Figure 3: This rigorous process results in attractive sustainability outcomes
MSCI ESG rating distribution1
(% equities in portfolio)
Source: MSCI, Ninety One, Morningstar. As of 31 March 2022.
We are at a historic moment in the debate on climate, so no discussion on sustainability would be complete without specific reference to how we are tackling the enormous climate change challenge. It is our collective responsibility. By acting together, we believe investors, companies and policymakers can influence a shift towards a low-carbon economy, while recognising that conventional energy sources will continue to play a role. As quality investors, our portfolios typically have a lower carbon intensity than comparable benchmarks; we have a natural bias away from low-quality capital intensive, financially leveraged and cyclical parts of the market, such as energy and resource companies, where many of the world’s largest emitters are found. By way of example, the Global Franchise strategy has a carbon intensity* of less than 1/10th that of the average MSCI ACWI company.
Figure 4: Carbon footprint of the Global Franchise Strategy versus average MSCI AWI Company
Source: MSCI, Ninety One, Morningstar. As of 31 March 2022.
Given the importance of climate risk to the environment, society and long-term sustainable returns, we continue to evolve and enhance how we integrate carbon analysis into our research process and valuation analysis. In this regard, we are further developing our proprietary tools and methodologies, albeit recognising the ongoing challenges of accurately assessing and quantifying carbon risk, as well as the challenges of data availability, reliability and consistency. There is still work to be done.
We also aim to ensure that there is sufficient decarbonisation ambition in the companies we typically own, which is reflective of their market position and opportunity. Furthermore, given our commitment as a firm to the Net Zero Asset Managers Initiative, we have reviewed all our Quality portfolios and holdings to ensure our companies are providing appropriate carbon disclosure and have credible targets and transition pathways in place to achieve net zero emissions by 2050 or before. We are encouraged that the vast majority do have appropriate targets, many of which are either currently or committed to being science based. We continue to engage with those companies in our portfolios where we see material risk or room for improvement.
Our ESG integration has evolved over the last decade – not least because client expectations and markets have changed, and the issues we are trying to understand from an investment perspective, such as climate change, have become more urgent and complex. As an industry, we are getting better at understanding and assessing the materiality of ESG issues. However, we continue to be challenged by the lack of standardisation of, and global access to, ESG data. We also believe that markets worldwide are not yet uniformly factoring in ESG-related issues. For all these reasons, ESG integration will continue to be a work in progress, but we remain firm and committed.
We believe that investing with a purist Quality approach in a holistic manner, supported by a global business that is committed to investing for a better tomorrow, makes the Ninety One Global Franchise strategy well-placed to tackle sustainability challenges and benefit portfolios.
ASML is a supplier of semiconductor capital equipment, focused on the most important step of the production process - lithography. Over the last decade, they have perfected the use of a next-generation technology that utilises extreme ultraviolet light ("EUV"), transforming them from being not just a dominant supplier, but rather a quasi-monopoly, a position created and protected by their technological supremacy.
A key stakeholder group for the company is their highly concentrated customer base (the largest customer accounts for roughly a third of revenue). Concentrated customers often have greater bargaining power, which can inhibit a company’s pricing power. This is not the case for ASML, given its long-standing commitment to sharing the benefits of its innovation equally with its customers. The company seeks to improve the productivity of its systems by approximately 10-15% each year, meaning more computer chips can be produced by each machine. Their ability to clearly quantify these gains justifies price increases with customers. This long-standing approach has allowed the company to consistently deliver pricing growth whilst keeping customers happy, a highly unusual combination.
ASML’s environmental sustainability is also impressive. The semiconductor manufacturing process requires considerable energy, water and raw materials, which can lead investors to dismiss the sector too readily on sustainability grounds. ASML is well positioned, however, having committed to net zero Scope 1 and 2 emissions by 2025. Furthermore, by making their lithography systems modular and upgradable, they stay in use for extremely long periods of time (95% of all systems ever built are still in the field), thereby minimising the use of raw materials.
However, an interpretation of sustainability that focuses solely on emissions fails to capture the true impact a company has on its various stakeholders. In the case of ASML, it misses the crucial role the company plays in the continuation of Moore’s Law, which allows the semiconductor industry to build faster, cheaper, and more efficient chips over time. This has significant positive externalities for society at large. Continued advances in chip design have enabled dramatic progress in fields such as healthcare, energy, and mobility. The path to net zero will require significant further technological advancement, and ASML’s technology is a key enabler of this innovation.
1. Includes a 2.8% proportion of unrated equity in Global Franchise against 0.2% benchmark.
The transition to net zero will not be linear or simplistic, especially for companies in carbon-intensive emerging market economies like South Africa. It is our responsibility to support their transition with integrity, and to approach decarbonisation from a real-world world-perspective and not from our own portfolio perspective.